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

Archived information

Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.

- Table of ContentsPrevious - Next -

Clause 32

Working Income Tax Benefit

ITA
122.7

New section 122.7 of the Act introduces the Working Income Tax Benefit (WITB). The WITB is a refundable tax credit, payable in respect of the 2007 and subsequent taxation years, to low-income individuals who have earnings from employment or business (referred to hereafter as “working income”). The purpose of the WITB is to make work more rewarding and attractive for Canadians already in the workforce and to encourage other Canadians to enter the workforce.

The WITB is made up of two parts: a basic amount (Basic WITB) and a supplement for individuals who are entitled to the disability tax credit (WITB Supplement). The Basic WITB provides a refundable tax credit equal to 20 per cent of each dollar of working income in excess of $3,000 to a maximum credit of $500 for single individuals without dependants (Single WITB) and $1,000 for couples and single parents (Family WITB). The WITB Supplement provides a refundable tax credit equal to 20 per cent of each dollar of working income in excess of $1,750 to a maximum credit of $250.

To target the WITB to low-income individuals and families, the Basic WITB and the WITB Supplement will be reduced if the individual’s income (or, where applicable, the combined income of the individual and the individual’s spouse or common-law partner) exceeds certain thresholds. For further information on the computation of the Basic WITB and the WITB Supplement, please refer to the commentary to new subsections 122.7(2) and (3).

The maximum credit for the Basic WITB and the WITB Supplement will be indexed annually after 2007 by reference to changes in the CPI.

Definitions

ITA
122.7(1)

New subsection 122.7(1) of the Act defines a number of terms for the purposes of the WITB.

“adjusted net income”

To ensure that the WITB is available only to low-income individuals, the WITB is gradually reduced for individuals whose “adjusted net income” (or, where applicable, the combined adjusted net income of the individual and his or her cohabiting spouse or common-law partner) exceeds certain thresholds. In this respect, the definition “adjusted net income” is a key component of the computation of the WITB.

An individual's adjusted net income for a taxation year is the individual’s net income for the year adjusted to include amounts that would otherwise be excluded from income because of paragraph 81(1)(a) or subsection 81(4) of the Act and to exclude certain items, such as a benefit received (or repaid) under the Universal Child Care Benefit Act, an amount under a Registered Disability Savings Plan and a capital gain arising under section 79 of the Act.

“cohabiting spouse or common-law partner”

The definition “cohabiting spouse or common-law partner” is relevant in determining if an individual is an eligible spouse of another individual. An eligible individual who has an eligible spouse for a taxation year is entitled to the Family WITB. For information on the meaning of eligible spouse, please refer to the commentary to the definition “eligible spouse” in this subsection. For information on the Family WITB, please refer to the commentary to new subsection 122.7(2) of the Act.

An individual’s cohabiting spouse or common-law partner means the individual's spouse or common-law partner who is not living separate and apart from the individual. For this purpose, spouses or common-law partners are not considered to be living separate and apart at any time unless they were living separate and apart, because of a breakdown of their marriage or common-law partnership, for a period of at least 90 days that includes that time.

“designated educational institution”

The definition “designated educational institution” is relevant for the purpose of the definition “ineligible individual” in this subsection. An ineligible individual for a taxation year includes an individual (other than the parent of an eligible dependant) who was enrolled as a full-time student at a designated educational institution for more than 13 weeks in the year. A designated educational institution is defined to have the meaning assigned by subsection 118.6(1) of the Act.

For information on the meaning of eligible dependant and ineligible individual, please refer to the commentary to the definitions “eligible dependant” and “ineligible individual” in this subsection.

“eligible dependant”

The definition “eligible dependant” is relevant in determining if a single individual is eligible for the Family WITB. It is also relevant in determining the income threshold at which the WITB Supplement for a single individual is reduced.

An eligible dependant of an individual for a taxation year means a child of the individual who, at the end of the taxation year, was under 19 years of age and who resided with the individual. However, an eligible dependant does not include a person who would otherwise be entitled to claim the WITB on his or her own behalf (i.e., a person who has a cohabiting spouse or common-law partner or is the parent of a child with whom the person resides).

For information on the Family WITB and the WITB Supplement, please refer to the commentary to new subsections 122.7(2) and 122.7(3) of the Act.

“eligible individual”

The definition “eligible individual” is relevant in determining if an individual may claim the WITB in a taxation year. An eligible individual for a taxation year is an individual (other than an ineligible individual) who was resident in Canada throughout the taxation year and who was, at the end of the taxation year, 19 years of age or older, the cohabiting spouse or common-law partner of another individual, or the parent of a child with whom the individual resides.

“eligible spouse”

The definition “eligible spouse” is relevant in determining if an eligible individual may claim the Family WITB. The Family WITB is available in a taxation year to an eligible individual who has either an eligible spouse or eligible dependant for the taxation year. An eligible spouse of an eligible individual for a taxation year means an individual (other than an ineligible individual) who was resident in Canada throughout the taxation year and who was the cohabiting spouse or common-law partner of the eligible individual at the end of the taxation year.

For information on the meaning of eligible individual and ineligible individual, please refer to the commentary to the definitions “eligible individual” and “ineligible individual” in this subsection. For information regarding the Family WITB, please refer to the commentary to new subsection 122.7(2) of the Act.

“ineligible individual”

The definition “ineligible individual” is relevant in determining if an individual is an eligible individual (i.e. eligible to claim the WITB) or an eligible spouse of an eligible individual for a taxation year. An ineligible individual cannot qualify as an eligible individual (i.e., may not claim the WITB) and does not qualify as an eligible spouse for the purpose of the Family WITB.

An ineligible individual for a taxation year means an individual who is described in paragraphs 149(1)(a) or (b) of the Act at any time in the taxation year, an individual (other than an individual who had an eligible dependant for the taxation year) who was enrolled as a full-time student at a designated educational institution for a total of more than 13 weeks in the taxation year, or an individual who was confined to a prison or similar institution for a period of at least 90 days during the taxation year.

For information on the meaning of eligible individual and eligible spouse, please refer to the commentary to the definitions “eligible individual” and “eligible spouse” in this subsection.

“return of income”

The definition “return of income” is relevant in that the WITB is only available to an individual in a taxation year if the individual has filed a return of income for the year. A return of income means the return (other than a return filed under subsection 70(2) or 104(23), paragraph 128(2)(e) or subsection 150(4) of the Act) that is required to be filed for the taxation year or that would be required to be filed if the individual had tax payable under Part I of the Act for the taxation year.

“working income”

The definition “working income” is relevant in determining if an eligible individual qualifies for the WITB in a taxation year. For example, to qualify for the Basic WITB, a single individual must have at least $3,000 of working income in the year (or, in the case of an individual with an eligible spouse, combined working income of $3,000). To qualify for the WITB Supplement, an individual must have at least $1,750 of working income in the year.

An individual’s working income for a taxation year is the total of the individual’s income from employment and from research grants, fellowships, scholarships, bursaries or prize included under paragraph 56(1)(n) or (o) of the Act (determined without reference to the deductions allowed in section 8 of the Act) and from any businesses carried on by the individual (otherwise than as a specified member of a partnership). An individual’s working income for a taxation year also includes any of these amounts that would, but for paragraph 81(1)(a) and subsection 81(4) of the Act, be included in the individual’s income for the year. Paragraph 81(1)(a) excludes from income amounts that are exempt from income tax under another enactment of Parliament (other than a tax treaty) while subsection 81(4) excludes the first $1,000 of an allowance received by an emergency volunteer.

Deemed payment on account of tax

ITA
122.7(2)

New subsection 122.7(2) of the Act contains the rules governing the Basic WITB. It provides that an eligible individual for a taxation year, who makes a claim for the Basic WITB in his or her return of income for the year, is deemed to have paid, on account of tax payable under Part I for the year, an amount determined in accordance with a formula. This amount (i.e, the Basic WITB), if any, will depend on whether the individual has an eligible spouse or eligible dependant for the year and on the working income and adjusted net income of the individual (or, in the case of an individual with an eligible spouse, the combined working income and adjusted net income of both individuals). The terms “adjusted net income”, “eligible individual”, “eligible spouse” and “working income” are defined in new subsection 122.7(1).

The Basic WITB is comprised of a tax credit for single individuals with no dependants (Single WITB) and a tax credit for couples and single individuals with one or more eligible dependants (Family WITB). For 2007, the Single WITB is computed by taking 20 per cent of each dollar of an individual’s working income in excess of $3,000 up to a maximum credit of $500 and subtracting from this amount 15 per cent for each dollar that the individual’s adjusted net income exceeds $9,500. The Family WITB is computed by taking 20 per cent of each dollar of the working income of the individual (and, if applicable, the individual’s eligible spouse) up to a maximum credit of $1,000 and subtracting from this amount 15 per cent for each dollar that the adjusted net income of the individual (and, if applicable, the individual’s eligible spouse) exceeds $14,500. The effect of this calculation is that, for the 2007 taxation year, the Single WITB will be reduced to zero for individuals with adjusted net income in excess of $12,832 while the Family WITB will be reduced to zero for single parents (and couples) with an adjusted net income (or combined adjusted net income) in excess of $21,167.

The maximum credit for the Basic WITB ($500 and $1,000) and the adjusted net income thresholds ($9,500 and $14,500) will be indexed annually, for taxation years ending after 2007, by reference to changes in the CPI.

New subsection 122.7(2) is subject to new subsections 122.7(4) and (5), which contain rules intended to ensure that, in the case of cohabiting spouses or common-law partners, only one of the spouses or partners claims the WITB for a taxation year.

Examples of the computation of the Basic WITB (Single and Family) are provided following the commentary to new subsection 122.7(12).

Deemed payment on account of tax - Disability supplement

ITA
122.7(3)

New subsection 122.7(3) of the Act contains the rules governing the WITB Supplement. It provides that an eligible individual for a taxation year who is entitled to the disability tax credit and who files a return of income for the year is deemed to have paid, at the end of the year, on account of tax payable under Part I, an amount determined in accordance with a formula. This amount (i.e., the WITB Supplement) if any, will depend on the working income and the adjusted net income of the individual (or, in the case of an individual with an eligible spouse, the combined adjusted net income of both individuals). The terms “adjusted net income”, “eligible individual”, “eligible spouse” and “working income” are defined in new subsection 122.7(1).

The WITB Supplement is computed by taking 20 per cent for each dollar of the individual’s working income in excess of $1,750 up to a maximum of $250 (indexed after 2007) and subtracting from this amount 15 per cent of the individual’s adjusted net income in excess of certain thresholds (or 7.5 per cent where the individual had an eligible spouse who was also entitled to claim the disability tax credit). In 2007, the adjusted net income thresholds are $12,833 (for a single individual with no dependants) and $21,167 (for a couple or a single individual with one or more dependants).

The maximum credit for the WITB Supplement ($500 and $1,000) and the adjusted net income thresholds ($12,833 and $21,167) will be indexed annually, for taxation years ending after 2007 by reference to changes in the CPI.

Examples of the computation of the WITB Supplement are provided following the commentary to new subsection 122.7(12) of the Act.

Eligible spouse deemed not to be an eligible individual

ITA
122.7(4)

New subsection 122.7(4) of the Act deems an eligible spouse not to be an eligible individual for the purpose of the Basic WITB if the eligible spouse made a joint application with the eligible individual for an advance payment of the WITB and the advance payment was received by the eligible individual. This provision is intended to ensure that, in the case of a couple, the individual who receives the advance payment is the individual who claims the Basic WITB for the year.

For information on advance payments, please refer to the commentary to new subsections 122.7(6) to (8).

Amount deemed to be nil

ITA
122.7(5)

New subsection 122.7(5) of the Act provides that where an eligible individual and an eligible spouse of the eligible individual both make a claim for the Basic WITB, the amount of the Basic WITB is deemed to be nil. This provision is intended to ensure that a couple does not file duplicate claims for the Basic WITB. The terms “eligible individual” and “eligible spouse” are defined in new subsection 122.7(1).

Application for advance payment

ITA
122.7(6)

New subsection 122.7(6) of the Act sets out the requirements governing applications for advance payments of the WITB. This subsection, which applies for the 2008 and subsequent taxation years, provides that an application for an advance payment must be made in prescribed form and submitted to the Minister of National Revenue between January 1 and September 1 of the relevant year. In the case of cohabiting spouses or common law partners, a joint application must be made in which the spouses or partners designate which of them is to receive the advance payment. The individual designated in a joint application must have either the higher expected working income for the taxation year or be an individual who can reasonably be expected to be entitled to the WITB Supplement for the year.

Advance payment

ITA
122.7(7)

New subsection 122.7(7) of the Act, which applies for the 2008 and subsequent taxation years, provides that the Minister of National Revenue may, subject to the restrictions set out in new subsection 122.7(8), pay to an individual who has applied for an advance payment one or more amounts which, in total, do not exceed one-half of the individual’s estimated WITB (i.e., one-half of the total of the Basic WITB and the WITB Supplement).

An advance payment under new subsection 122.7(7) will normally be made on the same payment cycle as the Goods and Services Tax (GST) Credit. For example, an advance payment approved in May 2008 will normally be paid in three equal instalments that are on each of July 5 and October 5, 2008, and January 5, 2009. In other cases, depending on the amount of the advance payment, the Minister may pay the amount in one lump sum.

Limitation - advance payment

ITA
122.7(8)

New subsection 122.7(8) of the Act provides that an advance payment of the estimated WITB shall not be made to an individual if the total amount estimated to be payable to the individual is less than $100 or the individual did not file a return of income for a preceding taxation year in respect of which the individual received an advance payment. The latter prohibition is intended to ensure that no portion of an advance payment for the previous year is repayable before another advance payment is made.

Notification to Minister

ITA
122.7(9)

New subsection 122.7(9) of the Act requires an individual who has applied for an advance payment to notify the Minister of National Revenue of the occurrence of certain events that may affect the individual’s entitlement to the WITB. More specifically, this provision requires an individual who has applied for an advance payment in a taxation year to notify the Minister if, in the taxation year, the individual ceases to be resident in Canada, ceases to be the cohabiting spouse or common-law partner of another person with whom the individual made the application, enrols as a full-time student at a designated educational institution, or is confined to a prison or similar institution. The individual is required to notify the Minister before the end of the first month following the month the event occurs.

Special rule for eligible dependant

ITA
122.7(10)

New subsection 122.7(10) of the Act deems a child not to be an eligible dependant of an individual for a taxation year if the child is also an eligible dependant of another individual for the year and both individuals identify the child as an eligible dependant for the purpose of the Basic WITB or the WITB Supplement. This provision is intended to ensure that not more than one parent identifies the child as an eligible dependant in a taxation year.

Effect of bankruptcy

ITA
122.7(11)

New subsection 122.7(11) of the Act is a special rule that applies in computing the WITB where an eligible individual or an eligible spouse of an eligible individual becomes bankrupt in a taxation year. It provides that, notwithstanding subsection 128(2) of the Act, any reference to the taxation year of the bankrupt individual is deemed to be a reference to the calendar year. In addition, it provides that the individual's working income and adjusted net income from both the pre-bankruptcy and post-bankruptcy periods will be taken into consideration in computing the WITB.

Special rules in the event of death

ITA
122.7(12)

New subsection 122.7(12) of the Act provides that an individual who dies after June 30 of a calendar year is deemed to meet certain status requirements that are relevant to the WITB. It is intended to ensure that an individual who dies more than six months after the beginning of a calendar year may qualify as an eligible individual, eligible spouse or eligible dependant for the year.

WITB Examples

These following examples are intended to illustrate the computation of the WITB in various circumstances utilizing the threshold amounts and maximum credit amounts in effect for the 2007 taxation year. Any computations that relate to the 2008 taxation year would have to be modified to take into consideration the effect of indexing.

1. Single WITB (with advance payment)

Jérôme is a single eligible individual with no dependants. He begins work in May 2008 following a four-month period of unemployment. At the time he begins work, Jérôme expects to earn approximately $10,000 of employment income for the year. Jérôme also starts a small business in 2008, which he does not expect to be immediately profitable.

Jérôme applies for an advance payment of the WITB in May 2008. Based on his estimated working income for the year ($10,000), Jérôme receives an advance payment of $213 under new subsection 122.7(7). The advance payment is paid to him in three instalments of $71 along with his quarterly GST credit cheques.

Jérôme files his 2008 tax return before the end of April 2009 and makes a claim for the Basic WITB. His total employment income for the 2008 taxation year, including some unexpected overtime work, was $12,000. However, Jérôme incurred a business loss of $1,500, leaving him with an adjusted net income for the 2008 taxation year of $10,500. He was not eligible to claim the disability tax credit in 2008.

Based on his working income and adjusted net income, Jérôme would be entitled to a Basic WITB of $350 for the 2008 taxation year, calculated as follows:

A – B

where

A is the lesser of:

(a) $500, and

 
 

(b) .20($12,000 - $3,000)

 
   

$500

B is:

.15($10,500 - $9,500)

($150)

   
   

$350

After taking into consideration the advance payment of $213, Jérôme receives a tax refund equal to $137.

If Jérôme had not incurred the business loss for the year, his adjusted net income would have been $12,000, leaving him with a WITB entitlement of $125. In this case, Jérôme would have been required to repay $88 of the advance payment (i.e., the amount by which the advance payment would have exceeded his WITB entitlement) or offset the excess advance payment with an amount that would otherwise be payable to him as a tax refund for the year.

2. Family WITB (cohabiting spouses or common-law partners)

Angelina is an eligible individual for the 2007 taxation year and on December 31, 2007, she has a common-law partner who is an eligible spouse. Both Angelina and her partner are employed during the year. Angelina earns $13,000 (including tips) working at a restaurant while her partner earns $6,000 in a part-time sales position. Neither Angelina nor her partner is entitled to the disability tax credit for the year.

Angelina and her partner do not apply for an advance payment and only Angelina makes a claim for the WITB for the 2007 taxation year. Based on their combined working income and adjusted net income for the year of $19,000, Angelina would be entitled to a Family WITB of $325, calculated as follows:

A – B

where

A is the lesser of:

(a) $1,000, and

 
 

(b) .20($19,000 - $3,000)

 
   

$1,000

B is:

.15($19,000 - $14,500)

($675)

   
   

$325

If Angelina’s partner did not qualify as an eligible spouse for the taxation year (e.g., he or she was not resident in Canada throughout the year), Angelina would not have been entitled to the Family WITB. In that case, Angelina would have been treated as a single individual for the purpose of computing her WITB entitlement. Based on her working income and adjusted net income of $13,000, Angelina would not receive the WITB in 2007 since the Single WITB is reduced to nil in 2007 for an individual with adjusted net income in excess of $12,832.

3. Family WITB with WITB Supplement

Galen and his spouse are eligible individuals for the 2007 taxation year and both of them are entitled to claim the disability tax credit. Galen’s working income for the year is $13,000 and his spouse’s working income is $2,500. Their combined adjusted net income for the year is $18,000 (the difference between their combined working income and adjusted net income is attributable to interest income on Galen’s Canada Savings Bonds).

In filing his income tax return for the 2007 taxation year, Galen claims the Family WITB and the WITB Supplement. Galen’s spouse also files a tax return for the year and claims the WITB Supplement. Based on their working income and adjusted net income, Galen and his spouse would calculate their WITB entitlements as follows:

Galen:

1. Family WITB

A – B

where

A is the lesser of:

(a) $1,000; and

 
 

(b) 20($15,500 – $3,000)

 
   

$1,000

B is:

.15($18,000 – $14,500)

($525)

   
   

$475

2. WITB Supplement

C – D

where

C is the lesser of:

(a) $250; and

 
 

(b) .20($13,000 – $1,750)

$250

D is:

.075($18,000 – $21,167)

($0)

   
   

$250

Galen’s Spouse:

3. WITB Supplement

C – D

where

C is the lesser of:

(a) $250; and

 
 

(b) .20($2,500 – $1,750)

 
   

$150

D is:

.075($18,000 – $21,167)

($0)

   
   

$150

4. Family WITB (single individual with an eligible dependant)

Gurinder is an eligible individual for the 2007 taxation year and on December 31, 2007, he has an eligible dependant. Gurinder’s working income and adjusted net income for the 2007 taxation year is $17,500. In these circumstances, Gurinder would be entitled to a Family WITB equal to $550, calculated as follows:

A – B

where

A is the lesser of:

(a) $1,000, and

 
 

(b) .20($17,500 - $3,000)

$1,000

B is:

.15($17,500 - $14,500)

($450)

   
   

$550

5. Death of an Eligible Spouse

Ernie and Hazel were married in 2002 and they have been resident in Canada since 2004. On October 30, 2007 Ernie is fatally injured in an automobile accident. For the 2007 taxation year, Ernie’s working income is $6,000 and his adjusted net income is $9,000 while Hazel’s working income and adjusted net income is $8,000. On December 31, 2007, Hazel is a single eligible individual with no dependants.

Assuming that Ernie was not an ineligible individual at the time of his death, he will be considered to be an eligible spouse of Hazel for the 2007 taxation year (please refer to new subsection 122.7(12)). Based on their combined working income ($14,000) and adjusted net income ($17,000), Hazel will be entitled to claim a Family WITB in respect of the 2007 taxation year equal to $625, calculated as follows:

A – B

where

A is the lesser of:

(a) $1,000, and

 
 

(b) .20($14,000 - $3,000)

 
   

$1,000

B is:

.15($17,000 - $14,500)

($375)

   
   

$625

Modification for purposes of provincial program

ITA
122.71

New section 122.71 of the Act permits the Minister of Finance to enter into an agreement with the government of a province or territory to modify the WITB with respect to residents of that province or territory. This provision, which applies to the 2007 and subsequent taxation years, is intended to allow the Government of Canada to implement province - or territory - specific changes to the design of the WITB to better harmonize it with existing provincial and territorial income support programs.

Clause 33

Investment tax credits

ITA
127

Section 127 of the Act permits deductions in computing taxable income in respect of logging, political contributions and investment tax credits (ITCs).

ITA
127(5)

Subsection 127(5) of the Act provides for the deduction of ITCs from a taxpayer's Part I tax otherwise payable. Subparagraphs 127(5)(a)(i) and (ii) are amended to add a reference to ITCs in respect of the creation of a child care space by a taxpayer. A child care space ITC is earned in respect of eligible child care space expenditures incurred by a taxpayer that carries on business in Canada (other than a business that otherwise includes the provision of child care spaces). For further information, please refer to the commentary to the new definitions “child care space amount” and “eligible child care space expenditure”, and new paragraph (a.5) of the definition “investment tax credit” in subsection 127(9). This change applies on and after March 19, 2007.

Investment tax credit of testamentary trust

ITA
127(7)

Subsection 127(7) of the Act permits a testamentary trust or a communal organization that is treated as an inter vivos trust to allocate its ITCs to its beneficiaries. Subsection 127(7) is amended, consequential to the introduction of ITCs in respect of child care space amounts, to add a reference to new paragraph (a.5) of the definition “investment tax credit” in subsection 127(9). This amendment applies on and after March 19, 2007.

Investment tax credit of partnership

ITA
127(8)

Subsection 127(8) of the Act provides for the allocation of the ITCs earned by a partnership to its partners. In general terms, subsection 127(8) allocates a portion of a partnership's ITCs to each partner based on what can reasonably be considered to be the particular partner's share of the ITCs. Subsection 127(8) is amended, consequential to the introduction of ITCs in respect of the child care space amount, to include a reference to new paragraph (a.5) of the definition “investment tax credit” in subsection 127(9) and to new subsections 127(28.1) and (28.11). This amendment applies on and after March 19, 2007.

Expenditure base

ITA
127(8.2)(b)(i)(A.2)

Subsection 127(8.2) defines, for the purpose of the at-risk rules in subsection 127(8.1), a limited partner's expenditure base for a taxation year (its fiscal period) of a partnership. Paragraph 127(8.2)(b) ensures that in no event can a limited partner's expenditure base exceed his or her proportionate share of the aggregate expenditure base of all limited partners of the partnership.

New clause 127(8.2)(b)(i)(A.2) is added to the Act, consequential to the introduction of ITCs in respect of child care space amounts, to ensure that eligible child care space expenditures incurred by a limited partnership in respect of the creation of child care space in a taxation year (its fiscal period) are taken into account in determining a limited partner's expenditure base. This amendment applies on and after March 19, 2007.

Amount of unallocated partnership ITC

ITA
127(8.31)

Subsection 127(8.31) of the Act provides for the determination of an amount, for reallocation to a general partner of a partnership, that cannot be allocated to a specified member of the partnership because of paragraph 127(8)(b) or to a limited partner of the partnership because of subsection 127(8.1). Subsection 127(8.31) is amended in two respects.

First, paragraph 127(8.31)(a) is amended, consequential to the introduction of ITCs in respect of child care space amounts, to include a reference to new paragraph (a.5) of the definition “investment tax credit” in subsection 127(9). This change ensures that eligible child care space expenditures incurred by a partnership in respect of the creation of child care space in a taxation year (its fiscal period) are taken into account in determining the reallocation of any unallocated partnership ITCs to a general partner of the partnership. This amendment applies on and after March 19, 2007.

Second, subparagraph 127(8.31)(b)(iii) is repealed to ensure that the calculation of a reallocated amount under subsection 127(8.31) does not result in an anomalous amount. Consistent with the initial application date of section 127(8.31), this change applies to the 2007 and subsequent taxation years.

Definitions

ITA
127(9)

Subsection 127(9) of the Act provides various definitions relevant for the purpose of calculating the investment tax credits (ITCs) of a taxpayer. Consequential to the amendments in respect of flow-through mining expenditures and the introduction of ITCs in respect of child care space amounts, new definitions are added, and the existing definitions in subsection 127(9) are amended, as follows.

“child care space amount”

The definition “child care space amount” of a taxpayer for a taxation year means, if the provision of child care space is ancillary to one or more businesses of the taxpayer carried on in Canada that do not otherwise include the provision of child care spaces, the lesser of

The child care space amount is the net ITC available to a taxpayer in respect of the eligible child care space expenditure of the taxpayer. This definition applies to expenditures incurred on and after March 19, 2007.

“eligible apprentice”

The definition “eligible apprentice” means an individual who is employed in a prescribed trade in Canada during the first two years of the individual's apprenticeship contract, which is registered with Canada or a province under an apprenticeship program designed to certify or license individuals in the trade.

The definition, “eligible apprentice” is amended in two respects:

First, the reference to “first two years” in the definition is changed to “first twenty-four months.” Second, the reference to “a prescribed trade in Canada” is changed to a reference to “a trade prescribed in respect of a province or Canada, as the case may be.” Consistent with the initial application date of this definition, these amendments apply to taxation years that end on or after May 2, 2006.

“eligible child care space expenditure”

The definition “eligible child care space expenditure” of a taxpayer for a taxation year means the total of certain expenditures incurred by the taxpayer in the taxation year for the sole purpose of creating one or more new child care spaces in a licensed child care facility operated for the benefit of the children of the taxpayer’s employees, or of a combination of children of the taxpayer’s employees and other persons. The expenditures that are included for this purpose are those incurred by the taxpayer:

The eligible child care space expenditure is the gross amount in respect of which a taxpayer can claim a child care space amount. This definition applies to expenditures incurred on and after March 19, 2007.

“flow-through mining expenditure”

The definition “flow-through mining expenditure” in subsection 127(9) of the Act defines the expenses (“eligible expenses”) that qualify for the 15 per cent ITC in respect of specified surface “grass-roots” mineral exploration. Under the existing definition, the credit is available only in respect of eligible expenses renounced under a flow-through share agreement made after May 1, 2006 and before April 1, 2007.

The definition, “flow-through mining expenditure” is amended to include eligible expenses incurred by a corporation after March 2007 and before 2009 where the expenses are incurred under a flow-through share agreement made after March 2007 and before April 2008.

“investment tax credit”

The definition “investment tax credit” in subsection 127(9) of the Act provides for the calculation of a taxpayer's ITC at the end of a taxation year and also ensures that a tax credit will not be generated in circumstances where the business income to which a cost or expenditure relates is not subject to income tax.

This definition is amended by adding new paragraph (a.5) and new subparagraphs (e.1)(vi) and (vii). New paragraph (a.5) and new subparagraph (e.1)(vii) are added consequential to the introduction of ITCs for the creation of child care spaces in Canada.

New paragraph (a.5) adds a taxpayer’s child care space amount for a taxation year to the calculation of the ITC for the year. New paragraph (a.5) applies to taxation years that end on and after March 19, 2007, in respect of expenditures incurred on and after March 19, 2007.

New subparagraph (e.1)(vii) ensures that a taxpayer's ITC for a taxation year is increased as a result of a repayment of government assistance or non-government assistance that reduced an eligible child care space expenditure of the taxpayer. New subparagraph (e.1)(vii) applies to taxation years that end on or after March 19, 2007.

New subparagraph (e.1)(vi) ensures that a taxpayer's ITC for a taxation year is increased as a result of a repayment of government assistance, non-government assistance or contract payment that reduced the eligible salary and wages payable to an eligible apprentice. New subparagraph (e.1)(vi) applies to taxation years that end on or after May 2, 2006.

“specified child care start-up expenditure”

The new definition “specified child care start-up expenditure” is relevant for the purpose of calculating the eligible child care space expenditure of a taxpayer. The definition lists the start-up costs (other than a cost incurred to acquire a depreciable property) that can be included in calculating the eligible child care space expenditure of a taxpayer. To be included in the definition, an expenditure must be:

This definition applies to expenditures incurred on and after March 19, 2007.

“specified percentage”

The definition “specified percentage” in subsection 127(9) of the Act sets out the relevant rates at which ITCs are earned in different circumstances.

Paragraph (f.1) of the definition “specified percentage”, which provides the percentage of certain amounts subject to recapture, is restructured into subparagraphs (i) to (iii), and adds references to ITCs in respect of the apprenticeship job creation ITC and the child care space ITC.

The reference to 20 per cent in paragraph (f.1), in respect of subsections 127(18) to (20), is moved to new subparagraph (f.1)(i). A reference to a specified percentage of 10 per cent in respect of eligible salary and wages payable to an eligible apprentice under paragraph 127(11.1)(c.4) is included in new subparagraph (f.1)(ii), and a reference to a specified percentage of 25 per cent in respect of an eligible child care space expenditure under new paragraph 127(11.1)(c.5) is included in new subparagraph (f.1)(iii). New subparagraphs (f.1)(i) and (ii) of the definition apply to taxation years that end on or after May 2, 2006. New subparagraph (f.1)(iii) of the definition applies to taxation years that end on or after March 19, 2007.

“specified property”

The definition “specified property” is relevant for the purpose of calculating the eligible child care space expenditure of a taxpayer and lists the properties the cost of which cannot be included in calculating the eligible child care space expenditure of a taxpayer. These properties are:

  • the taxpayer,
  • an employee of the taxpayer,
  • a person who holds an interest in the taxpayer, or
  • a person related to any of the persons mentioned above.

This definition applies to expenditures incurred on and after March 19, 2007.

Investment tax credit

ITA
127(11.1)

Subsection 127(11.1) of the Act sets out various rules for determining amounts to be included for the purpose of the definition “investment tax credit” in subsection 127(9). These rules provide for the reduction of the capital cost of a property and the reduction of qualified expenditures by amounts that qualify as assistance or contract payments. Subsection 127(11.1) is amended in two respects.

First, paragraph (c.4) is amended to ensure that it is the eligible salary and wages payable by a taxpayer for the taxation year, and not the taxpayer's apprenticeship expenditure for the taxation year, to which the reduction applies for assistance payments. This amendment applies to taxation years that end on or after May 2, 2006.

Second, new paragraph (c.5) is added to reduce the amount of a taxpayer's eligible child care space expenditure by the amount of any government or non-government assistance. New paragraph (c.5) applies to taxation years that end on or after March 19, 2007.

Time of expenditure and acquisition

ITA
127(11.2)

Subsection 127(11.2) of the Act provides that for the purposes of claiming an ITC under subsection 127(5), or allocating an ITC under subsection 127(7) or (8), property is not considered to have been acquired, and expenditures are not considered to have been made, until the property is considered to have become “available for use.”

Subsection 127(11.2) is amended, in three respects, consequential to the introduction of ITCs in respect of child care space amounts:

This amendment applies on and after March 19, 2007.

Recapture of investment tax credit – child care space amount

ITA
127(27.1)

New subsection 127(27.1) of the Act applies if a taxpayer has claimed a child care space amount, under the investment tax credit (ITC) regime, in respect of a property, and the taxpayer then disposes of the property within 60 months of acquiring it. The subsection requires a taxpayer to add an amount, determined under new subsection 127(27.12), to the taxpayer's tax payable under Part I. New subsection 127(27.1) applies on and after March 19, 2007.

Disposition

ITA
127(27.11)

New subsection 127(27.11) of the Act extends the meaning of “disposition” of a property for purposes of determining the recapture amount under new subsection 127(27.1).

Generally, those circumstances in which recapture occurs are the cessation or lease of the use of a child care space, or the conversion to a use other than the use as a child care space, where the cost of the related property was claimed as an eligible child care space expenditure under the ITC regime in any of the 60 preceding months.

New paragraph 127(27.11)(a) treats a child care space to be a property disposed of if the child care space ceases to be available.

New paragraph 127(27.11)(b) treats child care spaces to cease to be available in reverse chronological order to their creation; i.e., the last child care space created is considered to be the first to cease as such a space.

New paragraph 127(27.11)(c) treats a property acquired by a taxpayer or a partnership in respect of a child care space to have been disposed of, if the property

New subsection 127(27.11) applies on and after March 19, 2007.

Amount of recapture

ITA
127(27.12)

New subsection 127(27.12) of the Act establishes the investment tax credit (ITC) recapture amount that is required to be added under subsection 127(27.1) or (28.1) to the Part I tax payable by a taxpayer (including a member of a partnership) in circumstances described in new subsection 127(27.11). New paragraphs 127(27.12)(a) and (b) establish the amount of the recapture.

New paragraph 127(27.12)(a) establishes the amount required to be added to the tax payable under Part I of the Act where the taxpayer has disposed of a child care space. This amount will generally be equal to the amount that can reasonably be considered to have been included under paragraph (a.5) of the definition “investment tax credit” in subsection 127(9), by the taxpayer or partnership.

In circumstances where new subsection 127(27.11) treats a taxpayer as having disposed of a property, but new paragraph 127(27.12)(a) does not apply, new paragraph 127(27.12)(b) establishes the amount required to be added to the tax payable by the taxpayer under Part I of the Act. This amount is the lesser of the amount that can reasonably be considered to be a taxpayer’s child care space amount and 25 per cent of the proceeds of disposition in respect of the related property (or of its fair market value if the property is disposed of to a person with which the taxpayer does not deal with at arm’s length). New subsection 127(27.12) applies on and after March 19, 2007.

Recapture of partnership’s investment tax credits – child care property

ITA
127(28.1)

New subsection 127(28.1) of the Act provides an investment tax credit (ITC) recapture rule that applies where the property to which the recapture relates is partnership property. The amount calculated as the partnership's ITC available for allocation under subsection 127(8) is reduced by the amount determined under new subsection 127(27.12). New subsection 127(28.1) applies on and after March 19, 2007.

Addition to tax

ITA
127(30)

Subsection 127(30) of the Act applies where, at the end of a taxation year, a taxpayer is a member of a partnership that does not have a large enough balance in the partnership's ITC balance otherwise available for allocation under subsection 127(8) to offset the ITC recapture required by subsection 127(28) or (35). In those circumstances, the total of all amounts which are added in calculating the partnership's ITCs balance available for allocation under subsection 127(8) is less than the total of all amounts which reduce the partnership ITC balance. The amount by which the reductions to the partnership’s ITC balance exceed the additions to it can be viewed as a “negative” partnership ITC balance. The portion of the amount by which the partnership ITC balance is “negative” (the “excess”) that can reasonably be considered to be the taxpayer's share is added to the taxpayer's tax payable under Part I for the year.

Subsection 127(30) is restructured, and is amended to add references to new subsection 127(28.1). This change will provide for ITC recapture in respect of the disposition of partnership property as required by new subsection 127(28.1), for allocation under subsection 127(8), consequential to the introduction of ITCs in respect of child care space amounts. This change applies on and after March 19, 2007.

Clause 34

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

ITA
141(5)

This amendment is consequential to the replacement of the “prescribed stock exchange” concept by the new category of “designated stock exchange”. Please refer to the commentary on Clause 55 for more information.

Clause 35

Registered education savings plans - definitions

ITA
146.1(1)

Subsection 146.1(1) of the Act defines a number terms that apply for registered education savings plans (RESPs).

“designated provincial program”

Subsection 146.1(1) of the Act is amended to add the definition “designated provincial program”. The definition is relevant for the purposes of the deduction under paragraph 60(x) and the definitions “contribution” and “trust” in subsection 146.1(1). A “designated provincial program” is a program administered pursuant to an agreement entered into under the Canada Education Savings Act or a prescribed program. It is intended that the education savings incentive program proposed by the Government of Quebec in its 2007 budget be prescribed for this purpose.

This amendment applies to the 2007 and subsequent taxation years.

“contribution”

Several provisions in section 146.1 and Part X.4 of the Act, as well as provisions in the Canada Education Savings Act, apply to contributions made to RESPs. The definition “contribution” ensures that, for the purposes of these provisions, an amount paid into an RESP under the Canada Education Savings Act or under a similar provincial program administered under that Act is not considered to be a contribution to the plan.

The definition “contribution” is amended to replace the reference to a program administered pursuant to an agreement entered into under the Canada Education Savings Act with a reference to the newly defined expression “designated provincial program”. The effect of this amendment is to ensure that a payment into an RESP under a prescribed program is not considered to be a contribution to the plan.

This amendment applies to the 2007 and subsequent taxation years.

“trust”

For the purpose of the RESP rules, a “trust” is defined to be any person who irrevocably holds property pursuant to an education savings plan for a number of specified purposes. Under paragraph (c.1) of the definition, a trust can provide for the repayment of amounts under the Canada Education Savings Act or under a similar provincial program administered under that Act.

Paragraph (c.1) of the definition “trust” is amended to replace the reference to a program administered pursuant to an agreement entered into under the Canada Education Savings Act with a reference to the newly defined expression “designated provincial program”. The effect of this amendment is to ensure that an RESP trust can provide for the repayment of amounts in connection with a prescribed program.

This amendment applies to the 2007 and subsequent taxation years.

Clause 36

Charities

ITA
149.1

Section 149.1 of the Act provides the rules that must be met for charities to obtain and keep registered charity status. Section 149.1(1) is amended, concurrently with the addition of new section 149.2 and subsections 188.1(3.1) and (3.2) of the Act, to introduce an excess corporate holdings regime for private foundations. In general, these rules require that a private foundation divest itself of excessive shareholdings in corporations. Furthermore, a private foundation may be required to disclose material corporate shareholdings in its annual prescribed information return.

The new definitions in subsection 149.1(1) are generally effective as of March 19, 2007. Other amendments to section 149.1 generally apply to the taxation years of private foundations that begin on or after March 19, 2007. For details regarding transitional rules that apply in certain circumstances, refer to the commentary for subsection 149.2(8) of the Act.

Definitions

ITA
149.1(1)

The definitions in subsection 149.1(1) of the Act apply for the purposes of section 149.1 and Part V of the Act. Subsection 149.1(1) is amended to also apply these definitions for the purposes of new section 149.2 of the Act. In addition, new definitions are added that are relevant to amendments in respect of the corporate shareholdings of private foundations.

“divestment obligation percentage”

Under the new provisions affecting private foundations with corporate shareholdings, where, at the end of its taxation year, a private foundation has an “excess corporate holdings percentage” (as defined in subsection 149.1(1) of the Act) in respect of a class of shares of the capital stock of a corporation, the foundation is required to eliminate that excess corporate holdings percentage within a specified period. That is, the existence of such an excess results in a “divestment obligation percentage” of the foundation in respect of that class, as newly defined in subsection 149.1(1).

A net increase in the excess corporate holdings percentage of a private foundation for a taxation year is allocated to the divestment obligation percentage for that year or to one or more of the next five taxation years, according to the order established in new subsection 149.2(5) of the Act.

A net decrease to the foundation’s excess corporate holdings percentage for a taxation year reduces first the divestment obligation percentage of the foundation for that year. Any unapplied decrease at that time is applied under new subsection 149.2(7) to any subsequent-year divestment obligation percentage of the foundation that exists at that time.

Allocation of a net increase in excess corporate holdings percentage

More specifically, a net increase in the excess corporate holdings percentage of a private foundation for a taxation year, in respect of a class of shares, is allocated under subsection 149.2(5) to the foundation’s divestment obligation percentage for the current taxation year or one of the five subsequent taxation years in the following order:

  • the percentage of shares acquired by the private foundation in the current year by way of gift, other than from a relevant person or by way of bequest; and
  • the increase in the foundation’s holdings resulting from the redemption, acquisition or cancellation of the issued and outstanding shares of that class in the current year by the corporation.

Allocation of net decrease in the excess corporate holdings percentage

If a private foundation, itself or together with relevant persons who hold the same class of corporate shares, does not reduce its excess corporate holdings percentage so that its divestment obligation percentage for a taxation year equals zero per cent, the foundation is subject to penalties according to new subsection 188.1(3.1) of the Act. However, if there is a net decrease to the excess corporate holdings percentage of a class of shares of the capital stock of a corporation for a taxation year, that decrease is allocated under new subsection 149.2(7) as follows:

Any divestment obligation percentage for a taxation year that has not been reduced to zero per cent (and therefore is subject to penalty) is carried forward and added to the divestment obligation percentage for the next taxation year. Therefore, the portion of any divestment obligation percentage that remains outstanding at the end of the taxation year is carried forward to a subsequent taxation year and may be subject to a penalty more than once.

For additional details regarding the allocation of a net increase or decrease in the excess corporate holdings percentage to the divestment obligation percentage of a private foundation, refer to the commentary for subsections 149.2(5) and (7).

For details regarding transitional rules that apply in certain circumstances, refer to the commentary for the subsection 149.2(8).

Example – Excess corporate holdings rules

On March 19, 2007, Foundation X held no shares of Corporation Z, a position that had not changed by the first day of the foundation’s next fiscal period, January 1, 2008.

On January 15, 2008, a relevant person in respect of Foundation X donated to the foundation 45% of the Class A shares of Corporation Z. The limit that may be held without penalty is 20 %, and the deadline for divestment of an excess resulting from a donation from a relevant person is the end of the subsequent taxation year. Foundation X took a first step by selling a 15% interest on January 31, 2008.

As of December 31, 2008, Foundation X still held 30% of the Corporation Z shares, so for its 2008 taxation year the net increase in its excess corporate holdings percentage (i.e. over 20%) was 10%. As there were no other acquisitions of shares the full 10% increase was allocated to the divestment obligation percentage of 2009 (i.e. one year hence). That is, Foundation X had until the end of its 2009 taxation year to reduce that divestment obligation percentage to 0%.

The foundation filed with its 2008 annual return a list of two material transactions (i.e. the January 15 donation and the January 31 sale) and a schedule showing the opening and closing balances of Class A shares held. This list and schedule are required for every year in which Foundation X exceeds a 2% holding of Class A shares at any time in the year.

On February 15, 2009, Foundation X disposed of 10 % of the outstanding Class A shares of Corporation Z. However, on December 1, 2009, the foundation purchased 7% of the Class A shares.

The foundation’s balance of Class A shares was therefore 27% at the end of 2009. As such, the net decrease for 2009 was only 3% (i.e. from 30% down to 27%). After allocation of this 3% to its 2009 divestment obligation percentage of 10%, Foundation X still had an unsatisfied obligation percentage of 7%. The CRA could assess a penalty in respect of this excess under paragraph 188.1(3.1)(a) of the Act, equal to 5% of the value of that 7% interest. Furthermore, the 7% excess was added to the divestment obligation percentage for 2010.

In 2010 an unrelated person donated 10% of the Class A shares to the foundation (for which there is a two-year period to divest). In the same year, a bequest was received of 25% of the shares (for which there is a five-year period to divest). The foundation disposed of a 7 % interest in 2010. The net increase to its excess holdings percentage for the 2010 taxation year was therefore 28% (25% + 10% - 7%). In accordance with the excess corporate holdings rules, this net increase was allocated 25% to the divestment obligation percentage of the 2015 taxation year (five years hence), and the remaining 3% to the divestment obligation percentage of the 2012 taxation year (two years hence).

Because of the share acquisitions in 2010, Foundation X did not have a net decrease to its excess corporate holdings percentage in 2010, in spite of the divestment of a 7% interest. Therefore, there was no net decrease for the foundation to allocate to its 7% divestment obligation percentage for that year (i.e. the obligation carried forward). CRA could assess a penalty on that 7% excess corporate holding for the 2010 taxation year. Again, this 7% amount was carried forward to the divestment obligation percentage for 2011.

In the result, at the beginning of 2011, Foundation X had total holdings of 55% of the Class A shares of Corporation Z. The excess corporate holdings percentage (over 20%) was therefore 35%. The foundation’s divestment obligation percentages were 7% for the 2011 taxation year, 3 % for 2012 and 25% for 2015. (Note: 7% + 3% + 25 % = 35%).

During 2011, Foundation X disposed of a 15% interest in the Class A shares of Corporation Z and acquired no new shares, reducing its excess balance to 20% at the end of the year. In a schedule filed with its annual return for 2011, the foundation allocated the 15 % net decrease as follows: 7% to the 2011 divestment obligation percentage, 3% to the 2012 divestment obligation percentage, and 5% to the 2015 divestment obligation percentage. As the full obligation for 2011 was satisfied, no amount of the remaining 20% excess holdings percentage was subject to penalty in 2011. However, there remained an outstanding divestment obligation percentage of 20 % for the foundation’s 2015 taxation year.

The implications for Foundation X in this example are summarized in the following table.

 


 

Current Taxation Year

 
 

2008

2009

2010

2011


(a) Opening Balance of Excess Class A shareholdings *

Nil

10 %

7 %

35 %

(b) Closing Balance of Excess Class A shareholdings **

10 %

7 %

35 %

20 %


Net increase / <decrease> to the excess holdings percentage [(b) – (a)]

10 %

<3 %>

28 %

<15 %>

Allocation of net increase / <decrease> to the divestment obligation percentage for taxation year (balance in parentheses): **

       
  • 2008
       
  • 2009

10 %
(10 %)

<3 %>
(7 %)

   
  • 2010
   

7 %
(7 %)

 
  • 2011
     

7 %
<7 %>
(Nil)

  • 2012
   

3 %
(3 %)

<3 %>
(Nil)

  • 2013
       
  • 2014
       
  • 2015
   

25 % 
(25 %)

(25 %)

(c) Sum of balances, 2008 to 2015 **

10 %

7 %

35 %

25 %

Unsatisfied divestment obligation percentage for current year

Nil

7 %

7 %

Nil

  • Add to subsequent year
  • Subsection 188.1(3.1) penalty applies

* This is the balance of Class A shares of Corporation Z, held by the private foundation and by all relevant persons, that exceeds 20 % of all such issued shares.
** Note that the Closing Balance of the excess corporate holdings percentage for a year (line (b) in the above table) will always equal the sum of the balances of the divestment obligation percentages for current and future taxation years (line (c)).

“entrusted shares percentage”

The new definition “entrusted shares percentage” in subsection 149.1(1) of the Act applies in respect of the excess corporate holdings percentage of a private foundation. Specifically, where the foundation has an entrusted shares percentage greater than 20 per cent, the excess corporate holdings percentage is calculated by using the entrusted shares percentage instead of the 20 per cent threshold.

Entrusted shares are shares of a class of the capital stock of a corporation, held by a foundation at a particular time, that were acquired by way of a gift that is subject to a trust or direction that the foundation may not dispose of them before that time. The gift must have been made

The excess corporate holdings rules will first include the entrusted shares percentage in the taxation year of a foundation following the year, if any, in which the trust or direction no longer applies.

Shares held by a foundation on March 18, 2007 are also eligible for transitional relief. This transitional relief applies in the taxation year of the foundation following the expiry, if any, of the trust or direction. For that taxation year and subsequent ones, such shares are treated under the transitional rules as if they were never subject to any trust or direction.

For details regarding transitional rules that apply in certain circumstances, refer to the commentary for subsection 149.2(8) of the Act.

“excess corporate holdings percentage”

The new definition “excess corporate holdings percentage” in subsection 149.1(1) of the Act applies in respect of the corporate shareholdings of a private foundation. An excess corporate holdings percentage in respect of a class of shares of a corporation gives rise to an obligation by the private foundation to divest of that excess in a current or future taxation year. Alternatively, relevant persons can divest to reduce the combined shareholdings.

An excess corporate holdings percentage generally arises as a result of acquisitions by a foundation for consideration or by way of a gift. It may also arise by way of acquisitions by relevant persons. The percentage of such holdings can also be affected by the issuance of new shares or the redemption and cancellation of issued shares by the corporation.

A relevant person in respect of a private foundation, as defined in subsection 149.1(1), is generally a person who does not deal at arm’s length with any person who controls, or with any non-arm’s length group of persons that controls, the foundation (as if the foundation were a corporation).

Specifically, an excess corporate holdings percentage in respect of a class of shares of the capital stock of a corporation refers to the number of percentage points by which the total corporate holdings percentage of the private foundation (which includes the holdings of all relevant persons) exceeds 20 per cent of the issued shares for that class. However, where the foundation has an entrusted shares percentage greater than 20 per cent, the excess corporate holdings percentage is calculated by using the entrusted shares percentage instead of the 20 per cent threshold. In general, entrusted shares are shares donated to a foundation before March 19, 2007 on condition that they be held for a specific or indefinite period.

If a private foundation holds only an insignificant interest (up to 2 per cent, as provided in subsection 149.2(1)) of the Act, its excess corporate holdings percentage is deemed to be zero per cent.

If a private foundation is, at any particular time, not a registered charity, the excess corporate holdings percentage of the foundation at that time is deemed to be zero per cent. As such, a private foundation that holds more than 20 per cent of the shares of a class of the capital stock of a corporation when it becomes a registered charity in a taxation year will have, at the end of that year, a net increase to its excess corporate holdings percentage (to the extent that it does not divest those holdings in the year). In this circumstance the foundation would have until the end of its subsequent taxation year to divest its excess corporate holdings.

Similarly, the excess corporate holdings percentage of a private foundation that ceases to be registered as such is deemed to be zero per cent, relieving the foundation of any divestment obligation.

An example of the calculation of the excess corporate holdings percentage is provided in the commentary to the definition “divestment obligation percentage” in subsection 149.1(1). For details regarding the divestment obligation percentage, a relevant person and entrusted shares, refer to the commentary for those definitions.

“material transaction”

The new definition “material transaction” subsection 149.1(1) of the Act applies in respect of the corporate shareholdings of a private foundation. In general, a material transaction of a private foundation, in respect of a class of shares of the capital stock of a corporation, means a transaction engaged in by the foundation or a relevant person if the total fair market value of the shares of the class that are acquired or disposed of exceeds the lesser of $100,000 and 0.5 per cent of the total fair market value of all of the issued and outstanding shares of the class.

A foundation may be required, as part of the prescribed information required to be reported with an information return for a taxation year beginning on or after March 19, 2007, to report any material transaction in the taxation year. For details regarding relevant persons, refer to the commentary for that definition in subsection 149.1(1).

“non-qualifying private foundation”

The new definition “non-qualifying private foundation” is relevant for the capital gains exemption for donations of publicly-listed securities in paragraph 38(a.1) of the Act and for the exemption from tax of the employment benefit that would otherwise be taxed when an employee donates a publicly-listed security acquired under an option granted by his or her employer under paragraph 110(1)(d.01) of the Act. Donations of shares to a non-qualifying private foundation are not eligible for these exemptions.

In general, a non-qualifying private foundation is a private foundation that had, on March 19, 2007, an excess corporate holdings percentage (as defined in subsection 149.1(1)) of which it has not divested itself before the end of its first taxation year that begins after March 19, 2012. For additional details regarding the excess corporate holdings percentage of a private foundation, refer to the commentary for that definition.

“original corporate holdings percentage”

The definition “original corporate holdings percentage” is relevant for the calculation of the excess corporate holdings percentage of a private foundation that is subject to the transitional rule under subsection 149.2(8) of the Act for the excess corporate holdings regime.

The “original corporate holdings percentage” is the “total corporate holdings percentage” of a foundation as of March 18, 2007. For additional details, refer to the commentary for that definition in subsection 149.1(1) of the Act.

“relevant person”

The new definition “relevant person” applies for the purpose of the calculation of the excess corporate holdings percentage of a private foundation in respect of a class of shares of the capital stock of a corporation. If a private foundation, together with any relevant persons, holds more than 2 per cent of the issued shares of a class, the foundation may be required, as part of the prescribed information required to be reported with an information return for a taxation year beginning on or after March 19, 2007, to report any material transaction engaged in by the foundation or a relevant person in the taxation year, as well as the balance of such shareholdings. Reporting is not required in respect of a relevant person whose holdings of a class of shares are small enough not to be a material interest (determined under subsection 149.2(1) of the Act) or who is found to be an estranged family member.

A relevant person, in respect of a private foundation, is generally a person who does not deal at arm’s length with any person who controls, or with any non-arm’s length group of persons that controls, the foundation (as if the foundation were a corporation). The existing definition “non-arm’s length” in the Act includes persons related to each other. In this regard, the existing rules for determining when a corporation is related to another person will apply as if the foundation were a corporation.

However, in order not to draw in individuals whose links to the foundation are tenuous, a relevant person does not include an individual who is at least 18 years of age, living separate and apart from the controlling person or member, and whom the Minister of National Revenue, on review of an application from the foundation, has agreed is dealing at arm’s length from the controlling person or member as a question of fact.

“total corporate holdings percentage”

The new definition “total corporate holdings percentage” is relevant for the calculation of the excess corporate holdings percentage of a private foundation. The total corporate holdings percentage in respect of a class of shares of a corporation is the percentage of shares of that class held by the foundation together with all relevant persons (as defined in subsection 149.1(1) of the Act) who hold a material interest in respect of that class.

Revocation of registration of private foundation

ITA
149.1(4)(c)

Paragraph 149.1(4)(c) of the Act provides that the Minister of National Revenue may revoke the registration of a private foundation that acquires control of a corporation. Paragraph 149.1(4)(c) is replaced concurrent with the introduction of the excess corporate holdings regime for private foundations, to provide that the Minister may revoke the registration of a private foundation that has not, in respect of its shareholdings of a corporation, reduced its divestment obligation percentage for a taxation year (if any) to zero per cent by the end of that year.

This amendment generally applies to taxation years commencing on or after March 19, 2007. However, private foundations subject to the transitional rule under subsection 149.2(8) of the Act will remain subject to existing paragraph 149.1(4)(c) until their transition is completed.

For more details, refer to the commentary to the definition “divestment obligation percentage” in subsection 149.1(1) of the Act, as well as to the commentary to subsections 149.2(8) and 188.1(3.1) of the Act.

Rules

ITA
149.1(12)(a)

Paragraph 149.1(12)(a) of the Act sets out the circumstances under which a charitable foundation is considered to control a corporation. This rule applies for the purposes of determining whether a public foundation should be deregistered under paragraph 149.1(3)(c), or a private foundation should be deregistered under paragraph 149.1(4)(c) of the Act, where the foundation has acquired control of a corporation.

Paragraph 149.1(12)(a) is amended to delete its reference to paragraph 149.1(4)(c) of the Act, which no longer prohibits the acquisition of control of a corporation by a private foundation. This amendment is concurrent with the introduction of the excess corporate holdings regime for private foundations, generally applicable to taxation years commencing after March 19, 2007. However, private foundations subject to the transitional rule under subsection 149.2(8) of the Act will remain subject to existing paragraph 149.1(12)(a) until their transition is completed.

For more details, refer to the commentary to the definition “divestment obligation percentage” in subsection 149.1(1), as well as to the commentary to paragraph 149.1(4)(c) and subsection 149.2(8).

Information may be communicated

ITA
149.1(15)

Subsection 149.1(15) of the Act authorizes the Minister of National Revenue to communicate certain information in respect of charities, such as the prescribed information that is required to be contained in the information return for a taxation year that is mandated under subsection 149.1(14). Under the excess corporate holdings regime, this prescribed information will include the percentage of shares of the capital stock of a corporation held by a private foundation and relevant persons, in respect of all classes of shares of that corporation, if the foundation’s holdings of one or more classes of shares of the corporation exceeds 2 per cent of the outstanding shares of that class at any time in the taxation year. Such a private foundation will also be required to report any material transactions during the year in respect of the corporation for any period during which the foundation held more than an insignificant interest in respect of any class of shares of the corporation (determined under subsection 149.2(1) of the Act). Specifically, the foundation will report any share transaction (or series of transactions) in respect of shares of the corporation that exceeds the lesser of $100,000 worth of shares of the class and 0.5 per cent of all outstanding shares of that class.

Subsection 149.1(15) is amended to add paragraph (c), requiring the Minister to disclose, if a private foundation that is a registered charity holds more than an insignificant interest in respect of a class of shares of the capital stock of a corporation,

Also, to assist taxpayers in determining whether a donation of publicly-listed shares is eligible for a capital gains exemption under paragraph 38(a.1) of the Act, the Minister will provide any opinion as to whether a private foundation is, at a particular time, a non-qualifying private foundation.

For more details, refer to the commentary to the definition “non-qualifying private foundation” in subsection 149.1(1) and under section 149.2.

Clause 37

Excess corporate holdings of private foundations

ITA
149.2

New section 149.2 of the Act is introduced concurrently with amendments to sections 149.1 and 188.1 of the Act to establish an excess corporate holdings regime in respect of private foundations. Section 149.2 provides rules relating to the calculation of the divestment obligation percentages of a private foundation in respect of its excess holdings of the shares of the capital stock of a corporation. These amendments are concurrent with the introduction of the definitions “excess corporate holdings percentage” and “divestment obligation percentage” in subsection 149.1(1).

New section 149.2 applies to taxation years of private foundations that begin on or after March 19, 2007.

Material and insignificant interests

ITA
149.2(1)

New subsection 149.2(1) of the Act contains rules of interpretation that apply in respect of the excess corporate holdings regime for private foundations. If a relevant person in respect of a private foundation holds a material interest in respect of a class of share, that person’s holdings are taken into consideration for the purpose of the calculation of the total corporate holdings percentage of the foundation and the reporting requirements of the foundation under subsection 149.1(14) of the Act.

New paragraph 149.2(1)(a) provides that a person has a material interest in respect of a class of shares of the capital stock of a corporation if the person holds more than $100,000 worth of the shares of that class or such holdings are more than 0.5 per cent of all the issued and outstanding shares of that class.

New paragraph 149.2(1)(b) provides that a foundation has an insignificant interest in respect of a class of shares of the capital stock of a corporation if the foundation holds 2 per cent or less of that class. If a foundation holds an insignificant interest in respect of a class of shares, the foundation is deemed to have no excess corporate holdings percentage in respect of that class. Furthermore, if at any time in a taxation year a private foundation holds more than an insignificant interest in respect of a class of shares, the foundation may be required, under the reporting requirements of subsection 149.1(14), to report its holdings of all shares of the corporation and those of any relevant person.

For more details regarding the definitions “excess corporate holdings percentage”, “relevant person” and “total corporate holdings percentage”, refer to the commentary for subsection 149.1(1).

Material transaction – anti-avoidance

ITA
149.2(2)

Subsection 188.1(3.1) of the Act imposes a penalty on a private foundation that fails to disclose a material transaction in the annual return that it is required to file under subsection 149.1(14) of the Act. New subsection 149.2(2) of the Act provides that if a private foundation or a relevant person in respect of the private foundation has engaged in a series of transactions, a purpose of which may reasonably be considered to be to avoid the application of the definition “material transaction” in subsection 149.1(1), each of those transactions or series of transactions is deemed to be a material transaction.

For more details regarding the definition “material transaction” and “relevant person”, refer to the commentary for subsection 149.1(1).

Net increase in excess corporate holdings percentage

ITA
149.2(3)

New subsection 149.2(3) of the Act provides for the calculation of the net increase, if any, in the excess corporate holdings percentage of a private foundation for a taxation year, in respect of a class of shares of the capital stock of a corporation. The amount is calculated as the amount by which the excess corporate holdings percentage of the foundation at the end of the taxation year exceeds its excess corporate holdings percentage at the end of the preceding taxation year.

A net increase for a taxation year will give rise to a divestment obligation percentage of the private foundation for the current year or one of the five subsequent taxation years, allocated in accordance with subsection 149.2(5).

For more details regarding the definitions “divestment obligation percentage” and “excess corporate holdings percentage”, refer to the commentary for subsection 149.1(1) of the Act.

Net decrease in excess corporate holdings percentage

ITA
149.2(4)

New subsection 149.2(4) of the Act provides for the calculation of the net decrease, if any, in the excess corporate holdings percentage of a private foundation for a taxation year, in respect of a class of shares of the capital stock of a corporation. The amount is calculated as the amount by which the excess corporate holdings percentage of the foundation at the end of the preceding taxation year exceeds its excess corporate holdings percentage at the end of the current taxation year.

A net decrease for a taxation year will reduce the divestment obligation percentage of the private foundation for the current year and any subsequent taxation years of the foundation, in chronological order, as provided for in subsection 149.2(7) of the Act.

For more details regarding the definitions “divestment obligation percentage” and “excess corporate holdings percentage”, refer to the commentary for subsection 149.1(1) of the Act.

Allocation of net increase in excess corporate holdings percentage

ITA
149.2(5)

New subsection 149.2(5) of the Act applies for the purpose of calculating the divestment obligation percentage of a private foundation for a taxation year, in respect of a class of shares of the capital stock of a corporation. If a private foundation has, from the beginning of its current taxation year to its end, increased its “excess corporation holdings percentage” in respect of a class of shares, that increase will result in an obligation to divest itself of some of those shares within a specified period, to be determined under subsection 149.2(5) in accordance with the manner in which the foundation acquired shares of that class in the taxation year. The divestment obligation percentage for a taxation year, in respect of a class of shares, which is defined in subsection 149.1(1) of the Act, is effectively a “pool” of acquisitions of the current year or prior years.

A detailed description of this pooling mechanism is provided in the description of the definition “divestment obligation percentage” in subsection 149.1(1).

Minister’s discretion

ITA
149.2(6)

New subsection 149.2(6) of the Act applies for the purpose of the allocation of a net increase to the excess corporate holdings percentage of a private foundation, under subsection 149.2(5), in respect of a class of shares of the capital stock of a corporation. Where it would be just and equitable to do so, subsection 149.2(6) provides that the Minister of National Revenue may defer the year to which a net increase will be allocated, upon application by the foundation. As such, the year for which a private foundation has a divestment obligation percentage in respect of an increase to the excess corporate holdings percentage of the foundation, normally allocated under subsection 149.2(5), may be deferred. For example, if a large donation were made to a foundation involving complex corporate structures or illiquid shares, the Minister could consider providing additional time for divestiture if the foundation could demonstrate that it had commenced disposition of the shares but that divestment could not occur more immediately because of securities regulations or without significantly depressing the price of the shares.

For more details regarding the definition “divestment obligation percentage” and “excess corporate holdings percentage”, refer to the commentary for subsection 149.1(1) of the Act.

Allocation of net decrease in excess corporate holdings percentage

ITA
149.2(7)

New subsection 149.2(7) of the Act applies for the purpose of calculating the divestment obligation percentage of a private foundation for a taxation year, in respect of a class of shares of the capital stock of a corporation. If a private foundation has, from the beginning of its current taxation year to the end of the year, decreased its “excess corporation holdings percentage” in respect of a class of shares, that decrease will result in a reduction to the divestment obligation percentage of the foundation for the current or subsequent taxation years. Subsection 149.2(7) provides that the net decrease will be considered to apply first to reduce the divestment obligation percentage of the taxation year in which the reduction occurred. Any unapplied portion of the net decrease will decrease the divestment obligation percentage of subsequent taxation years in chronological order. If all such divestment obligation percentages have been satisfied, any remaining amount of the net decrease for the current year will expire.

For more details regarding the definition “divestment obligation percentage” and “excess corporate holdings percentage”, refer to the commentary for subsection 149.1(1) of the Act.

Transitional rule

ITA
149.2(8)

New subsection 149.2(8) of the Act provides a transitional rule for the excess corporate holdings regime. The transitional rule applies to private foundations that had on March 18, 2007, an original corporate holdings percentage, in respect of a class of shares of the capital stock of a corporation, exceeding 20 per cent. Subsection 149.2(8) provides a private foundation with significant additional time (up to 20 years) to divest the excess holdings without being immediately subject to a penalty under new subsection 188.1(3.1) of the Act. To facilitate the application of this rule, a foundation should determine and report, in the information return for its first taxation year that begins on or after March 19, 2007, its original corporate holdings percentage, if any, in respect of a share class.

In general, a private foundation is to reduce the original corporate holdings percentage by 20 per cent every 5 years, beginning from the foundation’s first taxation year commencing on or after March 19, 2007, until such holdings reach 20 per cent (after which the general excess corporate holdings rules will begin to apply). Alternatively, any relevant person could divest of their holdings of the class of shares. More specifically, for the purpose of calculating a foundation’s excess corporate holdings percentage in respect of a class, the 20 per cent threshold for its first five taxation years will instead be equal to the original corporate holdings percentage. At the end of each of the next three 5-year periods, this threshold will be reduced by 20 per cent, until it has been reduced to the 20 per cent threshold that applies under the general rules.

In addition, within each 5-year period, the threshold that applies to a private foundation for a particular taxation year generally may not exceed its total corporate holdings percentage as at the end of its previous taxation year.

If, at the end of any taxation year a private foundation (together with relevant persons) has reduced its total corporate holdings in a class to 20 per cent or less, the transitional rule no longer applies.

In all other respects, the general rules for the excess corporate holdings regime apply. All donations and other acquisitions during the transitional period will be subject to the same rules for calculating increases and decreases to excess corporate holdings as would apply if the foundation were not eligible for transitional relief.

The reporting requirements under subsection 149.1(14) of the Act are not affected by the transitional rule under subsection 149.2(8) in respect of the divestment. For more details regarding these reporting requirements in respect of the excess corporate holdings regime for private foundations, refer to the commentary for subsection 149.1(15).

For more details regarding the definitions “divestment obligation percentage”, “excess corporate holdings percentage”, “original excess holdings percentage”, “relevant person” and “total corporate holdings percentage”, refer to the commentary for subsection 149.1(1).

Example 1 - Transitional Rule

Foundation X has a December 31 year-end. On March 18, 2007, Foundation X held 35% of the Class A shares in Corporation Z, and relevant persons held 50% of the Class A shares. In respect of all other corporate holdings, Foundation X either held an insignificant interest or had no excess corporate holdings percentage.

As the combined holdings of the foundation and relevant persons (35% +50%) were 85%, the “original excess holdings percentage” of the foundation was 85 per cent. Foundation X filed its 2008 information return and reported the original excess corporate holdings percentage, to which the transitional rules apply. As such, Foundation X (and the relevant persons) were required to reduce combined holdings to 65% within 5 years, to 45% within 10 years, to 25% within 15 years and to 20% within 20 years. There remained the option to reduce these combined holdings more rapidly.

During the 2009 taxation year of Foundation X, Corporation Z redeemed and cancelled 10% of the Class A shares, which had been held by an arm’s length person (i.e. who was not a relevant person). Foundation X and the relevant persons therefore now owned 94% of the Class A shares that remained outstanding. This created a divestment obligation percentage for Foundation X for its second subsequent taxation year, 2011, equal to 9% (i.e. 94% less 85%).

In 2011, Foundation X sold 9% of the Class A shares to an arm’s length person, thereby reducing its divestment obligation percentage for that year by 9%t.

For the 2013 taxation year of Foundation X, the 85% threshold was reduced to 65%. Because Foundation X had not made any further divestitures by the end of 2013, the reduction in the threshold resulted in a 20% net increase to its excess corporate holdings percentage for the 2013 taxation year. This net increase was allocated to the foundation’s divestment obligation percentage for 2014. Foundation X divested 20% of the Class A shareholdings, in order to prevent being liable for a penalty under subsection 188.1(3.1) of the Act.

 

Example 2 - Transitional Rule

On March 18, 2007, Foundation Y held 25% of the issued and outstanding Class A shares in Corporation Z, and relevant persons held 30% of that class of shares. In addition, the foundation held 5% of the issued and outstanding Class B shares of Corporation M, and relevant persons held 25% of that class of shares. In respect of all other classes of shares of each corporation whose shares were held by the foundation, Foundation X had an excess corporate holdings percentage equal to 0%. Therefore, transitional rules apply only to these Class A and B shares in corporations Z and M respectively.

The combined holdings of the foundation and relevant persons (25% +30%) in Corporation Z give the foundation a transitional period of up to 10 years in respect of that corporation. To prevent liability for a penalty under subsection 188.1(3.1) of the Act, combined holdings in Corporation Z could be reduced to 35% or less within 5 years, and to 20% or less within 10 years. In the alternative, Foundation X could divest sufficiently so that its holdings in the Class A shares would be at 2% or less.

In respect of Corporation M, the original combined holdings were 30%, so the foundation was required to complete its divestment within 5 years. In the alternative, Foundation X could divest sufficiently so that its holdings in the Class B shares would be at 2% or less.

Clause 38

Assessment

ITA
152(1)(b)

Subsection 152(1) of the Act lists certain refunds and deemed payments on account of tax that are to be determined in the course of assessing a taxpayer's tax. Paragraph 152(1)(b) refers to the specific provisions under which amounts are deemed to be paid on account of tax. This paragraph is amended, for the 2007 and subsequent taxation years, to add a reference to new subsections 122.7(2) and (3). New subsections 122.7(2) and (3) deem an amount equal to an individual’s WITB for a taxation year to have been paid on account of the individual’s tax payable for that year. For more information on the WITB, please refer to the commentary to new section 122.7.

Reassessment with taxpayer’s consent

ITA
152(4.2)(b)

Subsection 152(4.2) of the Act contains rules relating to the reassessment of tax, interest and penalties payable by a taxpayer and to the redetermination of tax deemed to have been paid by a taxpayer. Subsection 152(4.2) gives the Minister of National Revenue discretion to make a reassessment or a redetermination beyond the normal reassessment period when so requested by an individual or a testamentary trust. Paragraph 152(4.2)(b) refers to the specific provisions under which amounts are deemed to be paid on account of tax. This paragraph is amended, for the 2007 and subsequent taxation years, to add a reference to new subsections 122.7(2) and (3), which deem an amount equal to an individual’s WITB for a taxation year to have been paid on account of the individual’s tax payable for that year. For more information on the WITB, please refer to the commentary to new section 122.7.

Clause 39

Withholding obligation – exemption

ITA
153(1)

Subsection 153(1) of the Act imposes a withholding obligation on a person who pays certain amounts to another person. The detailed rules applicable for this purpose are found in the Regulations. With respect to certain amounts paid or payable to a non-resident person at any time during a taxation year, Regulation 105 requires the payor to withhold 15 per cent of the payment on account of the non-resident person’s tax liability under Part I of the Act, unless an exemption applies.

Consequential to the introduction of new subsection 115(2.3), which provides for an income tax exemption in respect of certain amounts received or receivable in respect of the 2010 Olympic Winter Games or the 2010 Paralympic Winter Games, paragraphs 153(1)(a) and (g) are amended to add references to new subsection 115(2.3), thus providing an exemption from the withholding obligation for amounts to which new subsection 115(2.3) applies.

Clause 40

No instalment required

ITA
156.1

Section 156.1 of the Act relieves an individual from the obligation of making tax instalments where the individual's tax payable is below a certain threshold.

ITA
156.1(1)

Definitions

Subsection 156.1(1) of the Act sets out definitions that are relevant for the purpose of determining whether relief from tax instalments is available to individual taxpayers under subsection 156.1(2). The definition “instalment threshold” establishes the threshold at and below which an individual is relieved from making tax instalments. Paragraphs 156.1(1)(a) and (b) of the definition “instalment threshold” are amended to provide that for 2008 and subsequent taxation years of an individual, the exemption for an individual for a taxation year applies, if “net tax owing” for the year, or for each of the two preceding years, is less than or equal to $3,000 ($1,800 for Quebec residents). The previous amount was $2,000 ($1,200 for Quebec residents).

Clause 41

Instalment payments

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. In general, a corporation is required to pay its tax liability for a taxation year in monthly instalments during the year. New subsection 157(1.1) allows small-Canadian-controlled private corporations (small-CCPCs) that meet the conditions set out in subsection 157(1.2) to pay their tax by quarterly instalments, instead of monthly.

Payment by corporations - monthly

ITA
157(1)

Subsection 157(1) of the Act specifies the amount and time for payment of a corporation's monthly tax instalments for a taxation year. Subsection 157(1) is amended in two respects. First, the preamble is amended to include a reference to new subsection 157(1.5), consequential to the introduction of quarterly instalments (instead of monthly) for certain small-CCPCs that meet the conditions set out in new subsection 157(1.2). Second, references in subparagraph 157(1)(a)(i) and paragraph 157(1)(b) to taxes payable by a corporation under Part I.3 (Tax on Large Corporations) of the Act are removed, as of 2006; corporations are no longer required to pay tax under that Part. The amendments to subsection 157(1) apply to taxation years that begin after 2007.

Payment by small-CCPC – quarterly instalments

ITA
157(1.1)

New subsection 157(1.1) of the Act allows small-CCPCs that meet the conditions set out in new subsection 157(1.2) to pay their annual tax liability by quarterly instalments instead of monthly. For this purpose, a quarterly instalment period is a period that does not exceed a three-month period in a taxation year of a corporation. Cooperative corporations and credit union corporations are deemed not to be CCPCs by subsections 136(1) and 137(7) respectively. However those subsections do not apply for the purpose of section 157. Therefore, where a cooperative corporation or a credit union corporation qualifies as a small-CCPC under new subsection 157(1.2), it will be entitled to pay its tax instalments quarterly instead of monthly.

Paragraph 157(1.1)(a) sets out the amounts and dates for the quarterly instalments of a small-CCPC. Paragraph 157(1.1)(b) provides that the balance of taxes under Parts I and VI.1 are due on the corporation’s balance-due day as defined in subsection 248(1), which generally in the case of a small-CCPC is three months after the corporation’s taxation year-end.

Based on subparagraphs 157(1.1)(a)(i), (ii) and (iii) the amount of quarterly instalments can be any of the following three amounts:

Quarterly instalments are due on the last day of each quarter of the corporation’s taxation year. Quarterly instalments will be available for small-CCPCs in respect of taxation years that begin after 2007.

Small-CCPC

ITA
157(1.2)

New subsection 157(1.2) of the Act sets out the conditions that a corporation must meet in order to be a small-CCPC and then to be eligible to pay its annual tax liability by quarterly instalments, instead of monthly.

Taxable income threshold for a small-CCPC

ITA
157(1.3)

New subsection 157(1.3) of the Act ensures that the reference to the amount in paragraph 157(1.2)(a) is, if a corporation is associated with other corporations, a reference to the total of the taxable incomes of the group of associated corporations. Subsection 157(1.3) applies to taxation years that begin after 2007.

Taxable capital threshold for a small-CCPC

ITA
157(1.4)

New subsection 157(1.4) of the Act ensures 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 (as that term is defined in section 181.2) by each corporation in the group of associated corporations.

Payment by corporation - ceased to be a small-CCPC

ITA
157(1.5)

New subsection 157(1.5) of the Act sets out the required payment amounts and dates for corporate income tax instalments and for any balance of corporate income tax payable, in a situation where a corporation no longer qualifies as a small-CCPC at any time during a taxation year. Subsection 157(1.5) applies to taxation years that begin after 2007.

A small-CCPC is entitled to pay tax instalments at the end of each quarter in a taxation year, and must pay the balance of its tax payable on its balance-due day. If at any particular time during the taxation year, such a corporation no longer meets the conditions set out in new subsection 157(1.2) to qualify as a small-CCPC, then the corporation will still be allowed to pay its next instalment due at the end of the current quarter. However, the corporation will have to begin to pay monthly tax instalment following that quarter.

It should be noted that a small-CCPC is not required to pay Part VI or XIII.1 tax; however, if a corporation ceases to qualify as a small-CCPC during the year, the corporation may be liable for taxes under those Parts for the year.

Subparagraphs 157(1.5)(a)(i) and (ii) set out the amount of monthly payments for the reminder of the taxation year that are required to be paid by the corporation after the current quarter. The corporation may chose to pay either of the following amounts as monthly instalments for the reminder of the year:

Paragraph 157(1.5)(b) ensures that the corporation's balance of tax payable for a taxation year is due on the corporation's “balance-due day” (as that term is defined in subsection 248(1)).

Subsection 157(1.5) applies to taxation years that begin after 2007.

$3,000 Threshold

ITA
157(2.1)

Subsection 157(2.1) of the Act is rewritten and amended in two respect. First, the reference to $1,000 is changed to $3,000 to provide that where a corporation's tax payable under Parts I, VI, VI.1 and XIII.1 or its first instalment base for the year is less than $3,000, the corporation is exempt from the requirement to make instalment payments. Second, the reference to Part I.3 of the Act is removed, as of 2006; corporations are no longer required to pay tax under that Part. This change applies to taxation years that begin after 2007.

Reduced instalments - monthly

ITA
157(3)

Consequential to the introduction of the quarterly instalments for small-CCPC’s and new subsections 157(1.1), (1.3) and (1.5), subsection 157(3) is amended to clarify that the subsection applies only to corporations that pay their annual tax liability by monthly instalments, as required under subsection 157(1) or (1.5). This amendment applies to taxation years that begin after 2007.

Reduced instalments – three month period

ITA
157(3.1)

New subsection 157(3.1) of the Act applies for the purpose of new subsection 157(1.1). Subsection 157(3.1), which applies to taxation years that begin after 2007, allows small-CCPCs to reduce each quarterly instalment by 1/4 of the amount of certain tax refunds. Paragraphs 157(3.1)(b) and (c) list these certain tax refund amounts.

Paragraph 157(3.1)(a) establishes the amount otherwise payable under subsection 157(1.1).

Paragraph 157(3.1)(b) allows a small-CCPC to reduce its quarterly payment by 1/4 of the corporation’s dividend refund as determined under section 129.

Paragraph 157(3.1)(c) allows a small-CCPC to reduce its quarterly payment by 1/4 of any amounts which are deemed by subsections 125.4(3), 125.5(3), 127.1(1) and 127.41(3) to have been paid on account of the small-CCPC’s tax payable under Part I for the year. These subsections, respectively, describe: Canadian film or video production tax credits, film or video production services tax credits, refundable investment tax credits and Part XII.4 tax credits (tax on qualifying environmental trusts).

Clause 42

Limitations – corporations

ITA
161(4.1)

Subsection 161(4.1) of the Act is rewritten and amended consequential to the introduction of new quarterly instalments for small-CCPC’s and subsection 157(1.1) to (1.5). This amendment applies to taxation years that begin after 2007.

Clause 43

False statements or omissions

ITA
163(2)(c.3)

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 or omission. This subsection is amended, applicable to the 2007 and subsequent taxation years, to add new paragraph 163(2)(c.3). This new paragraph is added as a consequence of the introduction of the WITB in new section 122.7. Paragraph 163(2)(c.3) is intended to ensure that the penalty is imposed where a false statement or an omission is made in connection with the WITB.

Clause 44

Tobacco manufacturers’ surtax – definitions

ITA
182(2)

Subsection 182(2) sets out a number of definitions that apply for the purpose of the tobacco manufacturers’ surtax. The amendments to the subsection apply to taxation years that end after 2006.

“tobacco manufacturing”

The activity of farming is currently excluded from the definition “tobacco manufacturing”. The definition is amended to exclude any exempt activity. Please refer to the commentary to the new definition “exempt activity” for further details.

“exempt activity”

Subsection 182(2) of the Act is also amended to add the new definition “exempt activity”. For the purposes of the tobacco manufacturers’ surtax, an exempt activity is excluded from being tobacco manufacturing. An exempt activity is defined to mean farming or leaf tobacco processing. In the case of leaf tobacco processing, it must also be the case that

(i) the activity is done by and is the principal business of the particular corporation,

(ii) the particular corporation does not manufacture any tobacco product, and

(iii) the particular corporation is not related to any other corporation that carries on tobacco manufacturing.

Clause 45

Exemption from Part IV tax

ITA
186.1(b)(vii)

Section 186.1 of the Act exempts certain corporations from tax under Part IV of the Act. The reference in subparagraph 186.1(b)(vii) to a registered securities dealer that was a “member” of a prescribed stock exchange in Canada is updated to refer to both a “member” and a “participating organization” of a prescribed stock exchange, effective after April 2, 2000. The timing of this amendment takes into account the demutualization of the Toronto Stock Exchange as of April 3, 2000, in which “member firms” of the exchange were converted into “participating organizations”.

The subparagraph is also amended by replacing the reference to “prescribed stock exchange” with a reference to the new category of “designated stock exchange”, as explained in more detail under the notes to new section 262. This amendment, which applies on and after the day on which the amending bill receives Royal Assent, merely updates the language of the provision and is not intended to alter its substantive effect.

Clause 46

Penalty for excess corporate holdings

ITA
188.1(3.1)

Section 188.1 of the Act generally provides for penalties for breaches of the Act by charities that may be more appropriate in certain circumstances than would be revocation of registered status. New subsection 188.1(3.1) provides for the imposition of a penalty on a private foundation in the event that it has, at the end of a taxation year, not reduced to zero per cent its divestment obligation percentage for that year in respect of a class of shares of the capital stock of a corporation.

As with other intermediate sanctions, repeated or uncorrected infractions of the excess corporate holdings rules may result in revocation of a foundation’s registration.

If a private foundation has, at the end of the taxation year, an outstanding divestment obligation percentage for that year, in respect of a class of shares, the foundation is liable to an initial penalty of 5 per cent of the fair market value of the shares represented by that divestment obligation percentage. The penalty is calculated based on the shareholdings as of the date of the end of the compliance period, but the penalty is not payable until assessed by the Canada Revenue Agency. The penalty is doubled, to 10 per cent, in either of the following circumstances:

  • a material transaction, in the taxation year, of the private foundation in respect of the class,
  • a material interest held at the end of the taxation year by a relevant person in respect of the private foundation, or
  • the total corporate holdings percentage of the private foundation in respect of the class at the end of the taxation year, unless at no time in the taxation year the private foundation held greater than an insignificant interest in respect of the class.

Where the amount of penalties assessed under section 188.1 for a taxation year, including any penalties under new subsection 188.1(3.1), exceed $1,000, a foundation is permitted to satisfy its liability by transferring amounts owing to eligible donees. As provided for in subsection 188(1.3), an eligible donee generally refers to an unrelated charity that is not under suspension from issuing official tax receipts, that has filed all information returns and that has no unpaid liabilities under the Act or the Excise Tax Act. This measure ensures that funds raised by a foundation may continue to be applied for charitable purposes.

For more details regarding the definitions “divestment obligation percentage”, “material transaction”, “relevant person” and “total corporate holdings percentage”, refer to the commentary for subsection 149.1(1). Regarding the interpretation of the term “material interest”, refer to the commentary for subsection 149.2(1).

Subsection 188(3.1) applies on Royal Assent.

Avoidance of divestiture

ITA
188.1(3.2)

New subsection 188.1(3.2) of the Act applies if a private foundation or a relevant person in respect of the foundation has engaged in a transaction or series of transactions, the result of which is that the foundation holds, directly or indirectly, an interest or right in a corporation other than shares, and the purpose of which was to avoid the application of a penalty under subsection 188.1(3.1) regarding a divestment obligation percentage in respect of those shares, by substituting shares of the class with that interest or right. The effect of subsection 188.1(3.2) is that, for the purpose of applying the excess corporate holdings rules in subsection 149.1(1) and section 149.2, in general, each of those interests or rights is deemed to have been converted into a number of shares of that class that would correspond in value to the value of the interest or right. As such, those “notional” shares will be included in calculating various percentages provided for in subsection 149.1(1), and the fair market value of such interests and rights will be included in calculating any penalty that may apply under subsection 188.1(3.1).

For more details regarding the definitions “divestment obligation percentage” and “relevant person”, refer to the commentary for subsection 149.1(1).

Subsection 188(3.2) applies on Royal Assent.

Clause 47

“qualified investment”

ITA
204

Section 204 of the Act sets out definitions for the purposes of Part X of the Act. These definitions include “qualified investment”. In its current form, the definition “qualified investment” refers to obligations described in clause 212(1)(b)(ii)(C). Concurrent with anticipated changes to the tax treaty between Canada and the United States, paragraph 212(1)(b) is being substantially revised, and this reference will no longer be valid. This amendment therefore replaces that reference with a reference to obligations described in paragraph (a) of the new definition “fully exempt interest” in subsection 212(3). For additional information, readers may consult the notes to that definition.

To coincide with the revision of paragraph 212(1)(b), this consequential amendment applies on and after the first day, if any, on which a tax treaty between Canada and the United States generally precludes Canada from taxing amounts of interest paid by persons resident in Canada to persons resident in the United States with whom the payers deal at arm’s length.

The language of paragraphs (c) and (d) of the definition “qualified investment” is also updated consequential to the replacement of the “prescribed stock exchange” concept by the new category of “designated stock exchange”. Please refer to the commentary on Clause 55 for more information.

Clause 48

Non-residents’ Canadian-source interest income

ITA
212

Part XIII of the Act, and specifically section 212, imposes a tax, commonly known as “non-resident withholding tax” on certain payments by residents of Canada to non-residents.

ITA
212(1)(b)

The payments that are taxable under Part XIII include some forms of interest. Paragraph 212(1)(b) is currently structured to apply the tax to interest payments other than those set out in a series of subparagraphs.

In a significant revision of the non-resident withholding tax, paragraph 212(1)(b) is amended. The new provision will exempt from the tax any interest payments that a payer resident in Canada makes to a non-resident recipient with whom the payer deals at arm’s length, other than those payments (“participating debt interest”) that are in effect a distribution of profits or the like. As well, interest on certain debt obligations (“fully exempt interest”) will be exempt even if it is paid to a non-arm’s length person or might be considered participating debt interest. This retains an important aspect of the current rule.

This fundamental change to paragraph 212(1)(b) is meant to coincide with anticipated changes to the tax treaty between Canada and the United States. In short, once the Canada-U.S. tax treaty precludes the U.S. from taxing arm’s length interest payments to residents of Canada, and precludes Canada from taxing such payments to U.S. residents, Canada will also generally refrain from taxing payments of arm’s length interest to residents of other countries.

The amendment of paragraph 212(1)(b) to effect this general exemption is found in subclause (2) of this clause; the definitions of “fully exempt interest” and “participating debt interest” are in subclause (3); and subclauses (4) and (5) set out consequential amendments to other portions of section 212. Each of these is briefly described below.

Subclause (1) provides a special interim measure. Under existing subparagraph 212(1)(b)(vii), interest paid by a corporation resident in Canada on arm’s length medium- and long-term corporate debt is, provided certain conditions are met, exempt from the section 212 tax. One key condition is, broadly, that the borrowing corporation must not under any circumstances (other than in some specific exceptional cases) be required to repay more than 25 per cent of the principal amount within five years from the date the debt was issued.

The specific exceptions under which early repayment can be provided for do not, as it happens, include the legislated removal of the tax itself. This is significant because a Canadian-resident corporation and a non-resident lender might wish to structure a current borrowing in the expectation of being able to take advantage in the future of the new Canada-U.S. tax treaty rule (if the lender is in the U.S.), or the amendment to paragraph 212(1)(b) (if the lender is elsewhere). To accommodate this possibility, subclause (1) adds to the list of circumstances in which the terms of a debt (or an agreement relating to it) may require the borrower to repay. The addition, new clause 212(1)(b)(vii)(G), refers to early repayment in the event that a change to the Act or a tax treaty relieves the lender from liability under Part XIII in respect of the interest. The new clause applies to obligations entered into on or after March 19, 2007.

Once the Canada-U.S. tax treaty generally removes source-country tax from cross-border payments of arm’s length interest, subclause (2)’s fully amended version of paragraph 212(1)(b) will come into effect. This provides that non-resident persons are taxable on any amounts of interest (other than fully exempt interest) they receive from non-arm’s length persons resident in Canada, as well as on participating debt interest. In other cases, no tax under subsection 212(1) is payable on the interest.

ITA
212(3)

Existing subsection 212(3) of the Act sets out special rules that affect the application of paragraph 212(1)(b)(vii). Those rules will no longer be required, and subsection 212(3) can instead set out the new definitions “fully exempt interest” and “participating debt interest”.

“Fully exempt interest” is interest, paid by a person resident in Canada to a non-resident person, that – provided it is not “participating debt interest” – is exempt from tax under paragraph 212(1)(b) even if the payer and the recipient do not deal at arm’s length. In brief, fully exempt interest includes interest paid: on government and quasi-government debt; on foreign real property mortgages (except where the interest is deductible in Canada); to prescribed international organizations; and under certain securities lending arrangements. The definition thus essentially replicates existing subparagraphs 212(1)(b)(ii), (viii), (x) and (xii).

“Participating debt interest” is, very generally speaking, interest that depends on the success of the payer’s business or investments. In its details, the definition draws directly from the concluding portion (the postamble) of existing paragraph 212(1)(b), and it is intended to have the same effect.

The new definitions in subsection 212(3) will apply when the Canada-U.S. tax treaty generally removes source‑country tax from cross-border payments of arm’s length interest.

ITA
212(14)

Current subparagraph 212(1)(b)(iv) of the Act exempts from tax under Part XIII payments of interest to non‑resident persons who hold “certificates of exemption” issued under subsection 212(14) and who deal at arm’s length with the payer of the interest. With the general exemption of all interest paid by persons in Canada to arm’s length non-residents, these certificates will no longer be necessary, and subsection 212(14) is repealed. This measure will apply when the Canada-U.S. tax treaty generally removes source-country tax from cross-border payments of arm’s length interest.

ITA
212(18)

Subsection 212(18) of the Act provides two special rules that apply to prescribed financial institutions and Canadian-resident registered securities dealers. The first rule requires the filing of a special return in relation to interest paid to non-resident persons, if the payer has, relying on particular exemptions in paragraph 212(1)(b), not withheld tax from the payments. With the broadening of the exemptions in that paragraph, this requirement is less relevant and is repealed.

The second rule is retained in amended subsection 212(18), which will take effect at the same time as the other amendments. This obligates the financial institutions and securities dealers to provide undertakings in relation to the avoidance of tax under Part XIII, if the Minister of National Revenue requires them to do so.

Amended subsection 212(18) will apply once the Canada-U.S. tax treaty generally removes source-country tax from cross-border payments of arm’s length interest.

ITA
212(19) and (20)

Subsection 212(19) of the Act sets out a tax that applies to registered securities dealers resident in Canada. As a consequence of changes to paragraph 212(1)(b), the references in subsection 212(19) to certain portions of that paragraph will no longer be correct. The subsection is modified accordingly.

One of the references in question is to “a securities lending arrangement described in subparagraph (1)(b)(xii).” Since that subparagraph will no longer exist, this is replaced with a reference to “a designated securities lending arrangement.” New subsection 212(20) defines such an arrangement, using a slightly altered version of the text of current subparagraph 212(1)(b)(xii).

The amendments to subsections 212(19) and new subsection 212(20) will apply when the Canada-U.S. tax treaty generally removes source-country tax from cross-border payments of arm’s length interest.

Payments to International Olympic Committee and the International Paralympic Committee

ITA
212(17.1)

Section 212 of the Act, in Part XIII, provides that certain payments that a non-resident person receives from a person resident in Canada are taxable in Canada. The tax is collected through a requirement that the person making the payment withhold and remit an amount on account of that tax. The rate at which this withholding is required is generally 25 per cent, although this rate is often reduced by tax treaties.

Subsection 212(17.1) is added to provide an exemption from withholding under Part XIII with respect to certain amounts that are paid or credited to the International Olympic Committee (IOC) or the International Paralympic Committee (IPC). The exemption applies only to amounts that the IOC or the IPC receives after 2005 and before 2011 in respect of the 2010 Olympic Winter Games or the 2010 Paralympic Winter Games, respectively.

Clause 49

Part XIII rules

ITA
214(8) and (11)

Section 214 of the Act sets out a number of rules in relation to the tax imposed by Part XIII of the Act on the Canadian-source income of non-resident persons. One of these, subsection 214(7), applies where certain debt obligations are assigned or transferred by a non-resident person to a person resident in Canada. That subsection treats as interest, and therefore as potentially subject to tax under paragraph 212(1)(b), a portion of the amount for which the obligation was assigned or transferred. Some obligations are excluded from this rule; and subsection 214(8) defines “excluded obligation” for this purpose. Subsection 214(8) relies for this purpose on certain subparagraphs of paragraph 212(1)(b). Since those citations will no longer be correct, subsection 214(8) is amended, with application when the Canada-U.S. tax treaty generally removes source-country tax from cross‑border payments of arm’s length interest.

As drafted, the amendment to subsection 214(8) refers to “subparagraph 212(1)(b)(iii) or (vii) as they applied to the 2007 taxation year”. This approach has been taken in order to preserve the effect of the subsection for the immediate future without unduly complicating it, pending a more comprehensive examination of the rules in section 214 in the light of the changes to paragraph 212(1)(b).

Subsection 214(11) provides a special reading of subparagraph 212(1)(b) in respect of certain deemed payments of interest by “non-resident-owned investment corporations” (NROs). The subsection is repealed, as the end of the special tax regime for NROs makes it unnecessary.

These amendments will apply when the Canada-U.S. tax treaty generally removes source-country tax from cross-border payments of arm’s length interest.

Clause 50

Administration

ITA
220

Section 220 of the Act sets out a number of rules relating to the administration and enforcement of the Act.

Joint election – pension income split

ITA
220(3.201)

New subsection 220(3.201) of the Act provides that the Minister of National Revenue may – where the Minister considers it just and equitable – extend the time for making, revoking or amending a joint election to split pension income under section 60.03 provided the request is made by a taxpayer resident in Canada and is made within 3 calendar years of the filing-due date for the year in which the election applies.

Any request to the Minister to permit a late, amended or revoked election must be made in writing and jointly by the taxpayer and the taxpayer’s spouse or common-law partner. In order to obtain such an extension, revocation, or amendment the taxpayer will have to demonstrate that the failure to file the election on time was beyond the taxpayer’s control and would cause unintended tax consequences.

New subsection 220(3.201) applies to the 2007 and subsequent taxation years.

Penalty for late filed, amended or revoked elections

ITA
220(3.5)

Subsection 220(3.5) of the Act provides that where the Minister of National Revenue permits a late, amended or revoked election, the applicant is liable to a penalty.

This subsection is amended to exclude elections under new subsection 220(3.201).

This amendment applies to the 2007 and subsequent taxation years.

Clause 51

Where taxpayer information may be disclosed

ITA
241(4)(q)

Subsection 241(4) of the Act authorizes the communication of taxpayer information to government officials, outside the Canada Revenue Agency, for limited purposes. Subsection 241(4) is amended, applicable on Royal Assent, to add new paragraph 241(4)(q), which provides for the disclosure of taxpayer information to an official of the government of a province solely for use in the management or administration by that government of a program relating to earning supplementation or income support.

Clause 52

Definitions

ITA
248(1)

Subsection 248(1) of the Act defines various terms for the purposes of the Act.

“designated stock exchange”

Subsection 248(1) of the Act is amended by adding the new definition “designated stock exchange”, as explained in more detail under the notes to new section 262. A designated stock exchange is a stock exchange, or that part of a stock exchange, for which a designation by the Minister of Finance under section 262 is in effect. The definition applies on and after the day on which the amending bill receives Royal Assent.

“functional currency”

Subsection 248(1) is amended to add the new definition “functional currency”. Functional currency is defined as having the meaning assigned by subsection 261.

“recognized stock exchange”

Subsection 248(1) of the Act is amended by adding the new definition “recognized stock exchange”. A recognized stock exchange is any stock exchange located in Canada or in a member country of the Organisation for Economic Co-operation and Development (OECD) that has a tax treaty with Canada. A designated stock exchange is also a “recognized stock exchange” (regardless of where it is located). The definition applies on and after the day on which the amending bill receives Royal Assent.

Rule re part of a stock exchange

ITA
248(29)

Subsection 248(29) of the Act provides a rule relating to a part, division, or subdivision of a stock exchange. The subsection is repealed, effective upon Royal Assent of the amending bill, consequential to the new definition of “designated stock exchange” under subsection 248(1) and new section 262, which render this subsection unnecessary.

Clause 53

Replacement of “prescribed stock exchange” by “stock exchange” – securities lending arrangements

ITA
260(1)

Subsection 260(1) of the Act provides certain definitions that apply for the purposes of the securities lending rules under the Act. The definitions “qualified security” and “qualified trust unit” currently apply only to certain securities listed on a prescribed stock exchange. The definitions are amended, applicable on and after the day on which the amending bill receives Royal Assent, to replace each reference to “prescribed stock exchange” with a reference to “stock exchange”. The term “stock exchange”, which is intended to include any stock exchange located anywhere in the world, including all designated stock exchanges and all recognized stock exchanges, is not defined – the generally accepted legal and commercial meaning of the term is intended to apply.

ITA
260(8)

Subsection 260(8) of the Act applies special rules, for the purposes of Part XIII of the Act, to certain “compensation payments” made under securities lending arrangements (SLAs). In its current form, the subsection refers to particular subparagraphs of paragraph 212(1)(b). With the restructuring of that paragraph, those references will no longer operate as intended. They are therefore amended.

Given the complexity of SLAs and the tax rules that apply to them, these amendments are described here only briefly.

The first reference is in subparagraph 260(8)(a)(ii), and is to subparagraph 212(1)(b)(vii). This specific citation is removed, with the result that the effect of subparagraph 260(8)(a)(ii) is broadened: for all purposes of Part XIII, the compensation payments in question will be treated as having been payable by the issuer of the security that was the subject of the securities lending arrangement.

The second reference is to a security described in existing subparagraph 212(1)(b)(ii). This is replaced, with no change in its effect, with a reference to the corresponding paragraph of the new subsection 212(3) definition “fully exempt security”.

These amendments will apply when the Canada-U.S. tax treaty generally removes source-country tax from cross-border payments of arm’s length interest.

Clause 54

Functional currency reporting and authority to designate stock exchange

ITA
261 and 262

Functional currency reporting

ITA
261

New section 261 of the Act confirms that, as a general rule, all amounts required to be determined under the provisions of the Act are determined in Canadian currency. It also provides, where certain conditions are met, an exception to this requirement. If the conditions are met, a Canadian corporation will be permitted to determine its Canadian tax results in the corporation’s functional currency. Except where otherwise indicated, these amendments apply to taxation years that begin on or after the bill enacting these provisions is assented to.

Definitions

ITA
261(1)

New subsection 261(1) defines certain terms used in section 261.

“Canadian currency year”

The definition “Canadian currency year” is relevant to various definitions in subsection 261(1) and various other subsections in section 261. A Canadian currency year of a taxpayer is defined as a taxation year of the taxpayer in respect of which subsection 261(4) did not apply to the taxpayer.

“Canadian tax results”

The definition “Canadian tax results” is relevant for the application of subsections 261(2), (4), (5) and (9) of the Act. The Canadian tax results of a taxpayer for a particular taxation year are:

The definition “Canadian tax results” is applicable to all taxation years.

“consolidated financial statements”

The definition “consolidated financial statements” is relevant to the definition “functional currency” in subsection 261(1) of the Act. The consolidated financial statements of a taxpayer are the financial statements of the taxpayer, prepared in accordance with generally accepted accounting principles.

“currency exchange rate”

The definition “currency exchange rate” is relevant for the purposes of new subsections 261(4), (5), (6), (7) and (10) of the Act. The currency exchange rate on a particular day is, in respect of a conversion of an amount determined in a particular currency into an amount determined in another currency, the average, for the 12 month period ending on the particular day,

“functional currency”

The definition “functional currency” is relevant for the purposes of various subsections in proposed section 261 of the Act. The functional currency of a taxpayer for a particular year of the taxpayer is the currency that is

“functional currency year”

The definition “functional currency year” of a taxpayer is relevant to various definitions in subsection 261(1) of the Act and various subsections in proposed section 261. A functional currency year of a taxpayer is a taxation year of the taxpayer in respect of which subsection 261(4) applies to the taxpayer.

“generally accepted accounting principles”

The definition “generally accepted accounting principles” is relevant to the definitions “consolidated financial statements”, “functional currency” and “legal-entity financial statements” in new subsection 261(1) of the Act. Generally accepted accounting principles are the accounting principles established or recommended by the Accounting Standards Board of Canada or such other accounting principles as are determined to be acceptable by the Minister of National Revenue.

“initial functional currency year”

The definition “initial functional currency year” is relevant to the application of the definitions “last Canadian currency year” and “transitional exchange rate” in proposed subsection 261(1) of the Act and proposed subsections 261(5), (6) and (10). An initial functional currency year of a taxpayer is a functional currency year of the taxpayer that immediately follows a Canadian currency year of the taxpayer.

“initial reversionary year”

The definition “initial reversionary year” is relevant to the application of proposed subsection 261(9) and (10) of the Act. An initial reversionary year of a taxpayer is the taxation year of the taxpayer that begins immediately after the last functional currency year of the taxpayer.

“last Canadian currency year”

The definition “last Canadian currency year” is relevant to the definition “transitional exchange rate” in proposed subsection 261(1) of the Act and proposed subsections 261(5) and (6). The last Canadian currency year of a taxpayer is the last taxation year of the taxpayer that ends before the beginning of the initial functional currency year of the taxpayer.

“last functional currency year”

The definition “last functional currency year” is relevant to the definition “initial reversionary year” in proposed subsection 261(1) of the Act and proposed subsections 261(8), (9), (12), (14), (16) and (17). The last functional currency year of a taxpayer is a functional currency year that immediately precedes a Canadian currency year of the taxpayer.

“legal-entity financial statements”

The definition “legal-entity financial statements” is relevant to the definition “functional currency” in proposed subsection 261(1) of the Act. Legal-entity financial statements of a taxpayer for a taxation year are the financial statements of the taxpayer that would be prepared for that taxation year in accordance with generally accepted accounting principles for that taxation year if those generally accepted accounting principles did not require consolidation.

“qualifying currency”

The definition “qualifying currency” is relevant to the definition “functional currency” in proposed subsection 261(1) of the Act. Qualifying currency of a taxpayer for a taxation year is:

“reversionary exchange rate”

The definition “reversionary exchange rate” is relevant to the application of proposed subsection 261(9) of the Act. Reversionary exchange rate of a taxpayer for a particular foreign currency year of the taxpayer is the average, for the 12 month period ending on the last day of the particular functional currency year of the taxpayer, of the rate of exchange (calculated by reference to the rate quoted by the Bank of Canada at noon on each business day in the period) for the exchange of the unit of currency that is the taxpayer’s functional currency for the Canadian dollar.

“tax credit”

The definition “tax credit” is relevant to the application of proposed subsection 261(10) of the Act. Tax credit means an amount deductible in computing a taxpayer’s tax payable, or deemed to have been paid on account of a taxpayer’s tax payable, under any Part of the Act for a taxation year.

“transitional exchange rate”

The definition “transitional exchange rate” is relevant to proposed subsections 261(5) and (6) of the Act. The transitional exchange rate of a taxpayer is the average, for the 12-month period ending on the last day of the last Canadian currency year of the taxpayer, of the rate of exchange (calculated by reference to the rate quoted by the Bank of Canada at noon on each business day in the period) for the exchange of the Canadian dollar for the unit of currency that is the functional currency of the taxpayer.

Canadian currency requirement

ITA
261(2)

New subsection 261(2) of the Act confirms that, in determining any amount under the provisions of the Act, each amount is to be determined in Canadian currency. Subsection (2) also confirms that a particular amount that is relevant in computing the taxpayer’s Canadian tax results and that is expressed in a currency other than Canadian currency on a day in a particular taxation year is, subject to subsection 79(7), paragraph 80(2)(k) and paragraph 142.7(8)(b), to be converted into Canadian currency using the rate of exchange (calculated by reference to the rate quoted by the Bank of Canada at noon on that day) on that day for the exchange of a unit of that other currency for a unit of Canadian currency, or such other rate as is acceptable to the Minister of National Renvenue. Subsection (2) is subject to subsections 261(3) to (10).

Proposed subsection 261(2) is applicable to all taxation years.

Application of subsection 261(4)

ITA
261(3)

New subsection 261(3) of the Act provides the conditions that must be met before a taxpayer can compute the taxpayer’s Canadian tax results for a particular taxation year using the taxpayer’s functional currency for the particular taxation year. This new subsection provides that subsection 261(4) will apply to a taxpayer for a taxation year where the following conditions are met:

  • for the taxation year immediately preceding the first taxation year in respect of which the election was made, or
  • where there was not a taxation year immediately preceding the first taxation year in respect of which the election was made, for the first taxation year in respect of which the election was made,

- Table of ContentsPrevious - Next -