Archived - Explanatory Notes Relating to the Budget and Economic Statement Implementation Act, 2007 and Draft Regulations Relating to Tax Information Exchange Agreements : 1

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Preface 

A number of tax measures that were announced in the 2007 Budget were not ready for inclusion in Bill C-52 (S.C. 2007, c. 29, received Royal Assent on June 22, 2007), the Budget Implementation Act, 2007. Instead, draft legislative proposals to implement those measures were released for public consultation and comment on October 2, 2007 (News Releases 2007-074 and 2007-075). Also released on that date were explanatory notes to the proposals.

The Budget and Economic Statement Implementation Act, 2007 (the Bill) includes those same legislative proposals, as well as the measures originally announced on July 4, 2007, requiring the disclosure of information by publicly traded trusts and partnerships (News Release 2007-058). In some instances, the legislation has been modified as a result of the consultation process. The modifications to the legislative text mean that there are a few instances in which the explanatory notes, as originally released, no longer correspond to the proposed amendments.

Rather than reproducing the entire collection of explanatory notes of the releases, this document identifies those instances where the original notes do not correspond to the measures in the Bill. Where the amendments and the original explanatory text differ significantly, new text is provided. In other cases, more specific modifications are noted. Those explanatory notes from the October 2, 2007 releases that are not mentioned here can be presumed still to correspond to the provisions of the Bill, although the numbering of the legislative clauses has changed. This is also the case in respect of the July 4, 2007 release.

In addition, the draft legislative proposals released on October 2, 2007 assumed, for ease of understanding, that the measures in former Bill C-33 (now Bill C-10) were in place. As this assumption cannot be made in respect of the Bill, several provisions and their explanatory notes had to be revised, with the concordant introduction of amendments coordinating the provisions of Bill C-10 with those of the Bill.

This document also includes explanatory notes to the provisions in the Bill that implement measures announced in the October 30, 2007 Economic Statement.

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


Part 3 
Amendments Related to Income Tax

Income Tax Act

Revised explanatory notes to implement remaining Budget 2007 tax measures:

Clause 9

The explanatory notes should be revised by adding the following:

Inclusions

ITA
12

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

NISA receipts

ITA
12(10.2)

In 2007, the Government announced the new Agri-Invest program for implementation in 2008. The Agri-Invest program is similar to the net income stabilization account program introduced in 1991 under the Farm Income Protection Act ("old NISA"). Although deposits under the old NISA program ended on December 31, 2003, funds in NISA Fund No. 2 could be withdrawn on a taxable basis over a period of up to five years (in annual amounts of at least 20 per cent of the March 31, 2004 balance).

A farmer’s Agri-Invest savings account is also a NISA under the Farm Income Protection Act. The differences in program design between old NISA and Agi-Invest require amendments to the Income Tax Act. Under the Agri-Invest program, a participating farmer contributes amounts into a savings account based on the farmer’s gross farm revenues with the earnings from the fund being taxable annually. This savings account under the Agri-Invest program is a NISA Fund No. 1. In addition, the government makes matching contributions to a farmer’s NISA Fund No. 2. A farmer’s NISA Fund No 2. accumulates on a tax-deferred basis. The funds in both NISA Fund No. 1 and No. 2 are available to be invested by a farmer, with funds in NISA Fund No. 2 withdrawn in priority to amounts in NISA Fund No. 1.

Subsection 12(10.2) of the Act requires that a taxpayer’s NISA receipts from a NISA Fund No. 2 be included in income. In particular, taxpayers are required to include in income, as income from property, the total of all amounts determined by the formula A-B. The description of A is an amount paid at any particular time in the year out of the taxpayer’s NISA Fund No. 2. In general terms, the description of B provides a reduction from a payment out of a NISA Fund No. 2 to the extent that a farmer is deemed to have previously received amounts from the farmer’s NISA Fund No. 2.

The description of B is amended consequential to the enactment of new subsection 12(10.4), which is described below.

This amendment applies to the 2008 and subsequent taxation years.

Acquisition of control – corporate NISA Fund No. 2 balance

ITA
12(10.4)

New subsection 12(10.4) of the Act provides that the balance of a corporation’s NISA Fund No. 2 is treated as having been paid out immediately before an acquisition of control of the corporation. This rule ensures that a corporate NISA Fund No. 2 balance does not have preferred tax status when compared to an individual farmer’s NISA Fund No. 2 balance under the new Agri-Invest program.

In general, this amendment applies to the 2008 and subsequent taxation years.

Clause 12

Partnerships

ITA
18.2(9)

The reference to the word "owns" in the first paragraph of the explanatory note to subsection 18.2(9) should be replaced by the word "holds".

The reference to the words "paid or payable" in paragraph (b) of the explanatory note to subsection 18.2(9) should be replaced by the word "deductible".

Clause 15

Taxable capital gain – donation of listed securities

ITA
38(a.1)

The explanatory note to paragraph 38(a.1) should be replaced by the following:

Paragraph 38(a.1) of the Act provides that, where a capital gain results from the making of a gift of certain publicly traded securities to a qualified donee (other than a private foundation), no portion of the capital gain in respect of such a gift is included in computing a taxpayer's taxable capital gains. Paragraph 38(a.1) is amended to extend the capital gains exemption for such gifts, made on or after March 19, 2007, to private foundations.

The language of the paragraph 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 68 of the Bill for more information.

Clause 22

The explanatory notes should be revised by adding the following after the explanatory notes to subsections 80(1) and 89(1):

Transfer of property to corporations by shareholders

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

Eligible property

ITA
85(1.1)(i)

Subsection 85(1.1) of the Act describes the types of property (referred to in the Act as "eligible property") that may be transferred on a tax-deferred basis to a corporation under subsection 85(1).

Paragraph 85(1.1)(i) provides that a NISA Fund No. 2 is an eligible property. Paragraph 85(1.1)(i) is amended consequential to the introduction of the new Agri-Invest program to provide that a NISA Fund No. 2 owned by an individual is an eligible property. A corporate NISA Fund No. 2 does not qualify as an eligible property for the purposes of section 85.

In general, this amendment applies to the 2008 and subsequent taxation years.

Clause 26

Definitions - Foreign affiliates

ITA
95(1)

Consequential to the withdrawal of draft paragraphs 95(2)(f) to (f.2) for further consideration, a number of draft definitions in subsection 95(1) have been withdrawn. Accordingly, the explanatory notes to these draft definitions in subsection 95(1) should be deleted:

"calculating currency"
"calculating currency exchange rate"
"Canadian currency exchange rate"
"designated acquired corporation"
"designated taxable Canadian property"
"relevant non-arm’s length entity"
"taxable Canadian business"
"transitional exchange rate"

ITA
95(2)(a.1)

The word "immoveable" in the explanatory note to paragraph 95(2)(a.1) should be replaced by the word "immovable".

ITA
95(2)(f) to (f.2)

Draft paragraphs 95(2)(f) to (f.2) have been withdrawn for further consideration in response to submissions received.

ITA
95(2)(i)

The last paragraph of the explanatory note to paragraph 95(2)(i) should be replaced by the following:

These amendments to paragraph 95(2)(i) are part of the Global Section 95 Election package described at the beginning of the commentary to section 95. In the case of paragraph 95(2)(i), where such an election is validly made by a taxpayer in respect of all the taxpayer’s foreign affiliates,

ITA
95(2)(o)

The explanatory note to paragraph 95(2)(o) should be revised by replacing the fourth paragraph of that explanatory note by the following:

The second alternate test is that, throughout the period, in the fiscal period of the partnership that includes the particular time, during which the particular person was a member of the partnership

ITA
95(2)(u)

Consequential to the withdrawal of draft paragraphs 95(2)(f) to (f.2) for further consideration and thus the withdrawal of the draft definitions "designated taxable Canadian property" and "taxable Canadian business" in subsection 95(1), draft paragraph 95(2)(u) has been revised. Accordingly, the second paragraph of explanatory note to paragraph 95(2)(u) should be replaced by the following:

The first rule provides that, if any entity is a member of a particular partnership that is a member of another partnership, the entity is deemed to be a member of the other partnership for the purpose of

Rule for subsection 95(2)

ITA
95(2.2)

Consequential to the withdrawal of draft paragraphs 95(2)(f) to (f.2) for further consideration, draft subsection 95(2.2) has been revised. Accordingly, the reference to paragraph 95(2)(f.1) in the fifth paragraph of the explanatory note of subsection 95(2.2) should be deleted.

ITA
95(2.6)

Consequential to the withdrawal of draft paragraphs 95(2)(f) to (f.2) for future consideration and thus the withdrawal of draft subsection 95(2.6) and the draft definition "non-arm’s length entity" in subsection 95(1), the explanatory note to draft subsection 95(2.6) should be deleted.

Clause 29

Charitable donation of employee option securities

ITA
110(1)(d.01)

The explanatory note to paragraph 110(1)(d.01) should be replaced by the following:

When an employee acquires a publicly-listed security under an option granted by the employer and donates the security to a qualified donee (other than a private foundation) within 30 days, the employee may be eligible for a special deduction, the general effect of which is to exempt the associated employment benefit from tax. Paragraph 110(1)(d.01) of the Actis amended to extend this provision to donations to private foundations made on or after March 19, 2007.

Clause 30

Gifts of medicine

ITA
110.1(1)(e) of the October 2, 2007 release or
110.1(1)(a.1) of the Bill

The reference to paragraph 110.1(1)(e) in the explanatory note to subsection 110.1(1)(e) of the October 2, 2007 release should be read as paragraph 110.1(1)(a.1). Accordingly, the explanatory note to paragraph 110.1(1)(a.1) of the Bill should be replaced by the following:

ITA
110.1(1)(a.1)

Gifts by corporations of property held in inventory, to registered Canadian charities and other qualified donees, are eligible for a charitable donations deduction in respect of the gift. Paragraph 110.1(1)(a.1) of the Act is added to allow corporations that make donations of medicines from their inventory to claim a special additional deduction for "eligible medical gifts" (as provided in new subsection 110.1(8)), generally equal to the lesser of the cost of the donated medicine and 50 per cent of the amount, if any, by which the fair market value of the donated medicine exceeds that cost.

This measure applies to gifts made on or after March 19, 2007.

Eligible medical gift

ITA
110.1(8)

The reference to paragraph 110.1(1)(e) in the explanatory notes to subsection 110.1(8) should be read as paragraph 110.1(1)(a.1).

Clause 31

ITA
110.6(4)

The explanatory note to subsection 110.6 should be revised by adding the following after the explanatory note to subsection 110.6(2.3):

Maximum capital gains deduction

ITA
110.6(4)

Subsection 110.6(4) limits the total amount that may be deducted in respect of a taxpayer’s lifetime capital gains exemption under section 110.6 to the maximum of the amount determined by the formula in paragraph 110.6(2)(a).

Subsection 110.6(4) is amended to add reference to proposed new subsection 110.6(2.3), in order to take into account the additional amount that may be deducted under that subsection for a taxation year that includes March 19, 2007.

This amendment generally applies to taxation years that end on or after March 19, 2007.

Deductions denied

ITA
110.6(31) and (32)

The reference to "March 20, 2007" in the first paragraph of explanatory notes to paragraphs 110.6(31) and (32) should be replaced by "March 19, 2007".

Clause 36

ITA
118(1)(b.1)

The explanatory notes should be revised by adding the following after the explanatory note to section 118:

Child amount

ITA
118(1)(b.1)

Paragraph 118(1)(b.1) provides the amount for the child tax credit. The amount for the credit is $2,000 per eligible child who is under the age of 18 years at the end of a taxation year and is available to:

Eligibility for the wholly dependent relative credit is reduced by the dependent’s income. As a result, a parent who would otherwise be eligible to claim the child tax credit could (under the existing rule) be ineligible to claim the child tax credit because of the child’s income. Subparagraph 118(1)(b.1)(ii) is amended to provide that, in determining which parent is eligible to claim the wholly dependant relative credit for the purpose of the child tax credit, the income of the child is irrelevant.

This amendment applies to the 2007 and subsequent taxation years.

Clause 41

SIFT trusts – definitions – REIT

ITA
122.1(1)

The explanatory note to subsection 122.1(1) should be replaced by the following:

Subsection 122.1(1) of the Act sets out a number of definitions for the purposes of the rules that apply to "SIFT trusts" and, in some cases, "SIFT partnerships" (both of which terms are defined in subsection 248(1) of the Act). Among these is the definition "real estate investment trust". One of the requirements for a trust to be a real estate investment trust is that the fair market value of certain properties it holds must equal at least 75 per cent of the trust’s "equity value" (as itself defined in subsection 122.1(1)). In addition to real or immovable property and cash, the properties in question include certain obligations of Canadian governments and quasi-governmental entities.

In its current form, subsection 122.1(1) refers to these obligations as properties described in clause 212(1)(b)(ii)(C) of the Act. Paragraph 212(1)(b) of the Act is being substantially revised, and the reference in subsection 122.1(1) will no longer be valid. This amendment replaces that reference with a reference to properties 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 after December 31, 2007.

Clause 42

Deemed payment on account of tax - Disability supplement

ITA
122.7(3)

The amounts referred to for the maximum credit for the WITB Supplement in the third paragraph of explanatory note to subsection 122.7(3) should be read as $250 and $500 respectively.

Clause 43

"investment tax credit"

ITA
127(9)

The third paragraph of the explanatory note to subsection 127(9) of the definition "investment tax credit" should be replaced by the following:

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 in respect of expenditures incurred on and after March 19, 2007.

Clause 46

Definitions

ITA
149.1(1)

The explanatory note to subsection 149.1(1) should be revised by deleting the definition "non-qualifying private foundation" and by replacing the first paragraph of the definition "relevant person" with the following:

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 holds more than 2 per cent of the issued shares of a class, the foundation will 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.

Information may be communicated

ITA
149.1(15)

The last two paragraphs of the explanatory note to subsection 149.1(15) should be deleted.

Clause 51

$3,000 Threshold

ITA
157(2.1)

The reference to the word "respect" in the first sentence of the explanatory note to subsection 157(2.1) should be read as "respects".

Clause 57

"qualified investment"

ITA
204

The explanatory note to the definition of "qualified investment" in section 204 should be replaced by the following:

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). 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 after December 31, 2007.

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 68 for more information.

Clause 58

The explanatory notes should be revised by adding the following after the explanatory note to section 204:

Replacement of "prescribed stock exchange" by "designated stock exchange"

ITA
207.1(5)

The 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 68 for more information.

Clause 59

Non-residents’ Canadian-source interest income

ITA
212(1)(b)

The third paragraph of the explanatory note to paragraph 212(1)(b) should be deleted.

The last two paragraphs of the explanatory note to paragraph 212(1)(b) should be replaced by the following:

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 of the amendment to paragraph 212(1)(b). 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.

After December 31, 2007, 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)

The last paragraph of the explanatory note to subsection 212(3) should be replaced by the following:

The new definitions in subsection 212(3) will apply after December 31, 2007.

ITA
212(14)

The last sentence of the explanatory note to subsection 212(4) should be replaced by the following:

This measure will apply after December 31, 2007.

ITA
212(18)

The last paragraph of the explanatory note to subsection 212(18) should be replaced by the following:

Amended subsection 212(18) will apply after December 31, 2007.

ITA
212(19) and (20)

The last paragraph of the explanatory notes to subsections 212(19) and (20) should be replaced by the following:

The amendments to subsection 212(19) and new subsection 212(20) will apply after December 31, 2007.

Clause 60

Part XIII rules

ITA
214(8) and (11)

The last sentence of the first paragraph to explanatory notes to subsections 214(8) and (11) should be replaced by the following:

Since those citations will no longer be correct, subsection 214(8) is amended, with application after December 31, 2007.

The last paragraph of explanatory notes to subsections 214(8) and (11) should be replaced by the following:

These amendments will after December 31, 2007.

Clause 62

Regulations

ITA
221(1)(d.2)

This explanatory note was originally published as part of the draft amendments released on July 4, 2007 relating to the disclosure of information by publicly traded trusts and partnerships. The reference to the words "ANNOUNCEMENT DATE" in the second paragraph of the explanatory note to paragraph 221(1)(d.2) should be read as "July 4, 2007".

Clause 63

The explanatory notes should be revised by adding the following after the explanatory note to subsection 221(1):

Requirement to provide documents or information

ITA
231.2(1)

Subsection 231.2(1) provides that, notwithstanding any other provision of the Act, the Minister of National Revenue may by notice require that any person provide information or any document for any purpose relating to the administration or enforcement of the Act. An exception is made where the information or document relates to an unnamed person or persons, in which case the procedure set out in subsections 231.2(2) to (6) must be followed.

Subsection 231.2(1) is amended to provide that the Minister may by notice require any person to provide information or any document relating to the administration or enforcement of the Act, of a comprehensive tax information exchange agreement between Canada and another country or jurisdiction or, for greater certainty, of a tax treaty with another country.

A "tax treaty" is defined in subsection 248(1) to mean a comprehensive agreement for the elimination of double taxation on income between the Canadian and foreign government that has the force of law in Canada at that time.

Clause 64

The explanatory notes should be revised by adding the following after the explanatory note to subsection 231.2(1):

Where taxpayer information may be disclosed

ITA
241(4)(e)(xii)

Subparagraph 241(4)(e)(xii) is amended to provide that an official may provide taxpayer information, or allow the inspection of or access to taxpayer information under and solely for the purposes of a provision contained in a tax treaty or in a comprehensive tax information exchange agreement between Canada and another country or jurisdiction.

A "tax treaty" is defined in subsection 248(1) to mean a comprehensive agreement for the elimination of double taxation on income between the Canadian and foreign government that has the force of law in Canada at that time.

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 65

ITA
248(1)

The explanatory notes should be revised by adding the following after the explanatory note to paragraph 241(4)(q):

"NISA Fund No. 2"

The definition "NISA Fund No. 2" in subsection 248(1) is amended to apply only to the portion of the NISA Fund No. 2 balance that can reasonably be considered to be attributable to a program that allows the funds in the account to accumulate. This change is meant to distinguish a farmer’s Agri-Invest funds that may accumulate on a tax-deferred basis in the farmer’s NISA Fund No. 2 from other government funds that may be paid to the farmer indirectly through the account (e.g., payments made by government to a farmer under the Canadian Agricultural Income Stabilization (CAIS) program). Unlike amounts contributed to, or earned by, a tax-deferred NISA Fund No. 2, farm receipts are generally taxable in the year paid by government as ordinary income from a farm business under section 9, or under paragraph 12(1)(x) of the Act to the extent that section 9 does not apply to the receipt. This amendment clarifies that this tax treatment applies to CAIS receipts.

This amendment applies to the 2008 and subsequent taxation year.

Clause 66

Replacement of "prescribed stock exchange" by "designated stock exchange" – securities lending arrangements

ITA
260(8)

The explanatory note to subsection 260(8) should be replaced by the following:

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, consequential amendments are required to be made to subsection 260(8).

Existing subparagraph 260(8)(a)(ii), which deems interest under an SLA to be payable by the issuer of the security, effectively for the purpose of existing subparagraph 212(1)(b)(vii), is no longer necessary and is deleted.

Existing subparagraph 260(8)(a)(iii) is renumbered as (ii), and amended to refer, with no change to its effect, to the new definition "fully exempt interest" in subsection 212(3).

These amendments will apply after December 31, 2007.

ITA
260(9.1)

The explanatory notes should be revised by adding the following after the explanatory note to subsection 260(8):

New subsection 260(9.1) is added consequential to the introduction of the general withholding tax exemption in amended paragraph 212(1)(b) for interest paid to arm’s length non-residents.

The interest exemption is available for interest paid to a non-resident person with whom the payer deals at arm’s length. In the context of securities lending arrangements, this subsection deems the interest compensation payments in the arrangement to be interest paid between non-arm’s length persons, if the lender is not dealing at arm’s length with either or both of the borrower or the issuer of the security.

This amendment will apply after December 31, 2007.

Clause 67

Functional currency reporting

ITA
261(4)

The last paragraph (bullet) to the explanatory note to subsection 261(4) should be replaced by the following:

Where a taxation year of a foreign affiliate of a taxpayer ends in a particular taxation year of the taxpayer, references to "Canadian currency" in section 95 (and the references in the Regulations made for the purposes of section 95 – other than the reference in subsection 5907(6)) are to be read, in respect of the foreign affiliate, as references to "the taxpayer’s functional currency for the taxpayer’s particular taxation year".

Converting currency amounts

ITA
261(5) and (9)

In Example 1, contained in the explanatory note to proposed subsection 261(5), and in Example 3, contained in the explanatory note to proposed subsection 261(9), the item on the balance sheet referred to as "future tax liability" should read as a reference to "deferred income or gains".

Anti-avoidance

ITA
261(18)

The reference to paragraph 216(3)(e) in the explanatory note to subsection 261(18) should be read as paragraph 261(3)(e).

Authority to designate stock exchange

ITA
262

The references to the word "Minister" in the explanatory note to section 262 should be replaced by the words "Minister of Finance".

Clause 68

Replacement of "prescribed stock exchange" by "designated stock exchange"

ITA
Various references

The references to Clause 55 in the explanatory notes should be read as Clause 68.

The explanatory note to Clause 68 of the Bill should be replaced by the following:

These clauses amend various provisions of the Act consequential to the replacement of the "prescribed stock exchange" concept by the new category of "designated stock exchange", as explained in more detail under the notes to new section 262. These amendments update the language of the provisions but are not intended to alter their substantive effect. The amendments apply on and after the day on which the amending bill receives Royal Assent. The provisions of the Act amended by these clauses are the following:

Income Tax Application Rules

Clause 69

Certificates of exemption

ITAR
10(5)

The last sentence of the explanatory note to subsection 10(5) should be replaced by the following:

This measure will apply after December 31, 2007.

Income Tax Regulations

Clauses 72 and 73

Definitions

ITR
204.1 and 229.1

These explanatory notes were originally published as part of the draft amendments released on July 4, 2007 relating to the disclosure of information by publicly traded trusts and partnerships. The references to the words "ANNOUNCEMENT DATE" in the explanatory notes to sections 204.1 and 229.1 of the Regulations should be read as "July 4, 2007".

ITR
229.1(3)

This explanatory note was originally published as part of the draft amendments released on July 4, 2007 relating to the disclosure of information by publicly traded trusts and partnerships. The explanatory note to subsection 229.1(3) of the Regulations should be replaced by the following:

New subsection 229.1(3) of the Regulations provides that the time on or before which a public partnership is required to meet the requirements of subsection 229.1(2) is

  • 60 days after the end of the calendar year in which the fiscal period ends, and
  • four months after the end of the fiscal period, and

Clause 74

Stock exchanges

ITR
3200 and 3201

The references to Clause 59 in the explanatory notes should be read as Clause 74.

Clause 86

Prohibited investments

ITR
8514(2)

The explanatory note to subsection 8514(2) of the Regulations should be replaced by the following:

Subsection 8514(2) of the Regulations sets out a number of exceptions to the list of prohibited investments for registered pension plans, including:

Paragraph 212(1)(b) is being substantially amended, and the reference to clause 212(1)(b)(ii)(C) will no longer be valid. Paragraph 8514(2)(a) is amended to replace that reference with a reference to paragraph (a) of the new definition "fully exempt interest" in subsection 212(3). Refer to the commentary on that definition for more information. To coincide with the amendment to paragraph 212(1)(b), this consequential amendment applies after December 31, 2007.

Paragraphs 8514(2)(b) and (c) are also updated consequential to the replacement of the "prescribed stock exchange" concept by the new category of "designated stock exchange". Refer to the commentary on new section 262 of the Act for more information.


Part 4 
Disability Savings

Amendments Relating to Income Tax

Income Tax Act

Revised explanatory notes relating to registered disability savings plans:

Clause 108

ITA
87(10)

The explanatory notes should be revised by adding the following after the explanatory note to paragraph 75(3)(a):

Amalgamations – Shares deemed listed

ITA
87(10)

Subsection 87(10) of the Act provides a rule dealing with an amalgamation of two or more corporations where a predecessor corporation's listed shares are temporarily replaced by unlisted shares of the new corporation. Subsection 87(10) deems those temporary shares to have been listed on a designated stock exchange for the purposes of subsection 116(6), the definitions "qualified investment" in subsections 146(1), 146.1(1) and 146.3(1) and in section 204, and the definition "taxable Canadian property" in subsection 248(1). The inclusion of the references to the "qualified investment" definitions is necessary to ensure that certain types of property described in subparagraph (b)(i) or (ii) or paragraph (d) in the definition "qualified investment" in section 204 or in paragraph 4900(1)(i) of the Income Tax Regulations do not lose their qualified investment status in the course of an amalgamation.

Subsection 87(10) is amended to add a reference to the definition "qualified investment" in new subsection 205(1). This amendment, which applies to the 2008 and subsequent taxation years, is consequential to the introduction of registered disability savings plans.

Clause 115

ITA
146.4

Given that Registered Disability Savings Plans (RDSPs) are new to the tax system, the revised explanatory notes to the provisions setting out the structure of an RDSP, ITA section 146.4, are provided in their entirety.

Registered disability savings plans

ITA
146.4

New section 146.4 of the Act provides rules relating to registered disability savings plans.

In general terms, a registered disability savings plan is a trust arrangement, the beneficiary under which qualifies for the disability tax credit, and to which contributions (including grant and bond payments under the Canada Disability Savings Act) are made for the purpose of improving the long-term financial security of the beneficiary. Generally, there can never be more than one registered disability savings plan of a beneficiary at any given time.

The tax treatment of registered disability savings plans is similar, in some respects, to that of registered education savings plans. It is similar in that contributions are not deductible and investment income accrues on a tax-deferred basis. The tax treatment of payments made from registered disability savings plans is, however, quite different. Unlike registered education savings plans, each payment made from a registered disability savings plan is considered to be comprised, in part, of grants and bonds and investment income, and such part is included in the beneficiary’s income when the payment is received.

Section 146.4 applies to the 2008 and subsequent taxation years.

Definitions

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146.4(1)

New subsection 146.4(1) of the Act defines a number of terms that apply for the purposes of new section 146.4.

"assistance holdback amount"

Subsection 146.4(1) defines "assistance holdback amount", in relation to a disability savings plan, as having the meaning assigned under the Canada Disability Savings Act. (It is expected that the definition will be set out in regulations made pursuant to that Act, rather than in the Act itself.) In general terms, the assistance holdback amount is the amount that the plan would be required, under the Canada Disability Savings Act, to repay to the government if a disability assistance payment were made from the plan.

The definition is relevant for a number of provisions in new section 146.4 of the Act.

"contribution"

Subsection 146.4(1) defines "contribution" to a disability savings plan to exclude amounts paid into the plan under the Canada Disability Savings Act. This ensures, among other things, that grants and bonds paid into a registered disability savings plan under the Canada Disability Savings Act are not taken into account for the purpose of applying the $200,000 lifetime limit (in subparagraph 146.4(4)(g)(iii)) on contributions to registered disability savings plans of a beneficiary, and that grants and bonds are taxable when paid out of registered disability savings plans.

The definition "contribution" also excludes prescribed payments, in anticipation that some provinces may wish to make contributions to registered disability savings plans on behalf of their residents.

These exclusions do not apply for the purpose of paragraph (b) of the definition "disability savings plan" in this subsection. This ensures that an arrangement that receives no amounts other than bonds paid under the Canada Disability Savings Act may still qualify as a disability savings plan.

"disability assistance payment"

Subsection 146.4(1) defines a "disability assistance payment" in relation to a disability savings plan of a beneficiary to mean any payment made from the plan to the beneficiary during the beneficiary’s lifetime or to the beneficiary’s estate following the death of the beneficiary. In accordance with the registration condition in new paragraph 146.4(4)(i), disability assistance payments are one of three types of payments that a registered disability savings plan is permitted to make. (The others are transfers in accordance with subsection 146.4(8) and repayments to the government as required under the Canada Disability Savings Act.)

Under subsection 146.4(6), the amount by which a disability assistance payment exceeds the non-taxable portion of the payment (as determined under subsection 146.4(7)) is included in computing the income of the beneficiary or the beneficiary’s estate.

Section 146.4 places no restrictions on the timing or amount of a disability assistance payment, or on the use to which such a payment is put, apart from:

Under the Canada Disability Savings Act, a disability assistance payment made from a registered disability savings plan at a time when there is an assistance holdback amount in relation to the plan will trigger a requirement for the plan to repay the assistance holdback amount to the government.

"disability savings plan"

Subsection 146.4(1) defines "disability savings plan" of a beneficiary to be an arrangement, between a trust company (the "issuer") and one or more other entities, that is entered into in a year in which the beneficiary is a DTC-eligible individual (as defined in this subsection) and under which contributions are to be invested and used by the issuer to make payments to the beneficiary. (For the purposes of this definition, contributions include payments made into the plan under the Canada Disability Savings Act. This ensures that an arrangement that receives no amounts other than bonds paid under the Canada Disability Savings Act does not fail to qualify as a disability savings plan.)

The definition "disability savings plan" requires that the issuer be licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as trustee. In addition, the definition requires that, at the time the arrangement is entered into, there be an agreement between the issuer and the specified Minister (i.e., the Minister of Human Resources and Social Development) that applies to the arrangement for the purposes of the Canada Disability Savings Act.

The definition also limits the entity (or entities) with whom the issuer can enter into the arrangement to the following:

(a) the beneficiary,

(b) any entity that is, at the time the arrangement is entered into, a qualifying person in relation to the beneficiary, and

(c) a legal parent who is not, at the time the arrangement is entered into, a qualifying person in relation to the beneficiary, but who is, at that time, a holder of another registered disability savings plan of the beneficiary.

The expression "qualifying person" is defined in subsection 146.4(1). It includes, in the case of a beneficiary that has not reached the age of majority, the following entities:

(a) a legal parent of the beneficiary,

(b) a guardian, tutor, curator or other individual who is legally authorized to act on behalf of the beneficiary, and

(c) a public department, agency or institution that is legally authorized to act on behalf of the beneficiary.

In the case of a beneficiary who is of the age of majority but not competent to enter into a disability savings plan, it includes the entities described in (b) and (c) above. The exclusion of legal parents in the case of a contractually incompetent adult beneficiary means that a legal parent of such a beneficiary will be permitted to establish a disability savings plan for the beneficiary only if the parent is, at the time the plan is established, legally authorized to act on behalf of the beneficiary or a holder of a pre-existing registered disability savings plan of the beneficiary.

There are no qualifying persons in relation to a contractually competent adult beneficiary. This means that a disability savings plan can be established for such a beneficiary only by the beneficiary or by a legal parent who is, at the time the plan is established, a holder of a pre-existing registered disability savings plan of the beneficiary.

If there is a pre-existing registered disability savings plan of the beneficiary at the time a disability savings plan is established, subsection 146.4(3) generally requires that the pre-existing plan be wound-up within 120 days of the new plan being established in order for the new plan to qualify as a registered plan. In the course of the wind-up, funds from the pre-existing plan can be transferred to the new plan on a tax-free basis under subsection 146.4(8).

"DTC-eligible individual"

Subsection 146.4(1) defines an individual to be a "DTC-eligible individual" in respect of a year if the individual has a severe and prolonged physical or mental impairment in respect of which the individual, or another person, is entitled to a deduction under section 118.3 of the Act (generally referred to as the "disability tax credit") in computing tax payable for the year, or would be so entitled if the restriction for attendant care in paragraph 118.3(1)(c) of the Act were disregarded.

This definition is relevant for the definition "disability savings plan" in this subsection, because the beneficiary of the plan must be a DTC-eligible individual in respect of the year in which the plan is entered into in order for the plan to be a disability savings plan. It is also relevant for paragraph 146.4(4)(f), which prohibits contributions in any year in respect of which the beneficiary is not a DTC-eligible individual, and for paragraph 146.4(4)(p), which requires a registered disability savings plan to be terminated by the end of the year following the year in respect of which the beneficiary ceases to be a DTC-eligible individual (or, where DTC-eligibility is in dispute, by such later time as may be specified by the Minister in accordance with new paragraph 146.4(12)(d)).

"holder"

Subsection 146.4(1) defines "holder" of a disability savings plan of a beneficiary at any time to mean each of the following:

(a) An entity that has, at that time, rights as an entity with whom the issuer entered into the plan. – See the commentary on the definition "disability savings plan" in this subsection for a description of those entities who are permitted to enter into a disability savings plan of a beneficiary;

(b) An entity that has, at that time, rights as a successor or assignee of another holder of the plan. – See the commentary on paragraph 146.4(4)(b) for a description of those entities who are permitted to acquire rights as a successor or assignee of a holder of a disability savings plan; and

(c) The beneficiary, if the beneficiary is not otherwise a holder of the plan under paragraph (a) or (b) but nevertheless has, at that time, rights under the plan to make decisions (either alone or with other holders of the plan) concerning the plan. The beneficiary will not be considered to be a holder of the plan if the beneficiary’s only such right is to direct that disability assistance payments be made as provided for in subparagraph 146.4(4)(n)(iii).

As illustrated in the following examples, a disability savings plan may have several holders throughout its existence and more than one holder at any given time.

Example 1

The mother and father of a minor child jointly establish a disability savings plan for the child. – The parents are joint holders of the plan.

 

Example 2

A father establishes a disability savings plan for his child. The plan provides for decisions regarding the plan to be made solely by the father until the child reaches the age of majority, and then to be made jointly with the child. – The father is the sole holder of the plan until the child reaches the age of majority, at which time the father and the child become joint holders of the plan.

 

Example 3

The mother and father of an adult child with a mental impairment are the legal guardians of the child. The father establishes a disability savings plan for the child. Upon the father’s death, the mother acquires the father’s rights under the plan. – The father and mother are successive holders of the plan.

 

Example 4

A single mother, of a child with a physical impairment, establishes a disability savings plan for the child. The mother dies while the child is still a minor. The Children’s Aid Society assumes custody and care of the child, and acquires the mother’s rights and obligations under the disability savings plan. Upon reaching the age of majority, the child acquires all rights and obligations under the plan. – The mother, the Children’s Aid Society and the child are successive holders of the plan.

In practice, the holders of a disability savings plan will have the principal decision making authority with respect to the plan, which could include, for example, directing investments and the amount and timing of payouts.

A number of the registration rules in subsection 146.4(4) relate to holders of registered disability savings plans.

A holder of a registered disability savings plan will be subject to the provisions of the Act that impose sanctions relating to such plans. This includes new subsection 160.21(1), which makes holders jointly liable with the beneficiary (or the beneficiary’s estate) for taxes arising in connection with the deregistration of a non-compliant plan. It also includes new Part XI, which imposes taxes on holders in connection with various transactions relating to the plan, such as the acquisition of a non-qualifying investment or the disposition of an asset for inadequate consideration.

"lifetime disability assistance payments"

Subsection 146.4(1) defines "lifetime disability assistance payments" under a disability savings plan of a beneficiary to be disability assistance payments (as defined in this subsection)

This definition is primarily relevant for two of the registration conditions set out in subsection 146.4(4).

"plan trust"

Subsection 146.4(1) defines "plan trust" in relation to a disability savings plan to be the trust governed by the plan. This definition is provided simply for ease of reference.

"qualifying person"

Subsection 146.4(1) defines "qualifying person" in relation to a beneficiary of a disability savings plan at any time.

The following entities are qualifying persons in relation to a minor beneficiary:

(i) a legal parent of the beneficiary,

(ii) a guardian, tutor, curator or other individual who is legally authorized, at the time in question, to act on behalf of the beneficiary, and

(iii) a public department, agency or institution that is legally authorized, at the time in question, to act on behalf of the beneficiary.

The entities described in (ii) and (iii) above are also qualifying persons in relation to a beneficiary who is of the age of majority but not contractually competent to enter into a disability savings plan. This means that, while a legal parent is automatically considered to be a qualifying person in relation to a minor child, they are considered to be a qualifying person in relation to an adult child only if the child is not contractually competent and the parent is legally authorized to act on behalf of the child.

There are no qualifying persons in relation to a beneficiary who is of the age of majority and contractually competent.

This definition is relevant for the following provisions:

"registered disability savings plan"

Subsection 146.4(1) defines "registered disability savings plan" to be a "disability savings plan" (as defined in this subsection) that satisfies the conditions in subsection 146.4(2).

By virtue of this definition, a disability savings plan that satisfies the conditions in subsection 146.4(2) is a registered plan as of the time it is entered into. Unlike other registered plans (e.g., registered retirement savings plans, registered education savings plans), there is no requirement that the Minister of National Revenue accept the particular plan for registration.

However, if the conditions set out in subsection 146.4(3) are not subsequently satisfied, that subsection deems the plan never to have been a registered disability savings plan (i.e., the registered status conferred by subsection 146.4(2) is rescinded retroactively to the time when the plan was entered into). Subsection 146.4(3) requires that, within 60 days of the plan being entered into, the issuer notify the "specified Minister" (as defined in this subsection) of the plan’s existence, and that the issuer do so in prescribed form containing prescribed information. That subsection also requires that, within 120 days of the plan being entered into, any pre-existing registered disability savings plan of the beneficiary be terminated.

The definition "registered disability savings plan" also excludes a plan to which subsection 146.4(10) applies. Under that subsection, a registered disability savings plan that is non-compliant (as described in subsection 146.4(11) and subject to subsection 146.4(12)) ceases, as of the time that it becomes non-compliant, to be a registered plan.

"specified Minister"

Subsection 146.4(1) defines "specified Minister" to be the Minister designated for purposes of the Canada Disability Savings Act. This will be the Minister for Human Resources and Social Development. (By virtue of subsection 248(1), references in this section to "Minister" – rather than "specified Minister" – mean the Minister of National Revenue.)

"specified year"

Subsection 146.4(1) defines "specified year" for a disability savings plan as

However, a year will not qualify as a specified year unless the medical certificate has been provided to the issuer in or before the year in question. For example, if a doctor makes such a certification in respect of a registered disability savings plan beneficiary in 2011, but the issuer is not provided with the certification until 2012, only the years from 2012 to 2016 are specified years for the plan.

This definition is relevant for paragraph 146.4(4)(l) and subparagraph 146.4(4)(n)(i). These provisions limit the amount of disability assistance payments that can be paid from a registered disability savings plan in a calendar year, except if the year is a specified year.

Registered status

ITA
146.4(2)

New subsection 146.4(2) of the Act sets out the conditions that must be satisfied in order for a disability savings plan to be a registered disability savings plan, as defined in new subsection 146.4(1).

Paragraph 146.4(2)(a) requires that, before entering into the plan, the issuer of the plan receive written notification from the Minister of National Revenue that, in the Minister’s opinion, a plan with identical terms would, if entered into, comply with the conditions in subsection 146.4(4) – as would be the case if the plan were issued under a specimen plan that had previously been approved by the Minister. (Refer to the commentary on subsection 146.4(4) for further information.)

Paragraph 146.4(2)(b) requires that the issuer be provided, at or before the time the plan is entered into, with the Social Insurance Numbers of the beneficiary and of each of the entities entering into the plan. In other words, the plan cannot be established before this information is provided to the issuer.

Paragraph 146.4(2)(c) requires that, except in transfer situations, the beneficiary be resident in Canada when the plan is entered into.

By virtue of the definition "registered disability savings plan", a disability savings plan that satisfies the conditions in this subsection is a registered plan as of the time it is entered into. Unlike other registered plans, there is no requirement that the Minister of National Revenue accept the particular plan for registration.

However, if the conditions set out in subsection 146.4(3) are not subsequently satisfied, that subsection deems the plan never to have been a registered disability savings plan (i.e., the registered status conferred by subsection 146.4(2) is rescinded retroactively to the time when the plan was entered into). (Refer to the commentary on subsection 146.4(3) for further information.)

Registered status nullified

ITA
146.4(3)

New subsection 146.4(3) of the Act deems a disability savings plan never to have been a registered disability savings plan if the conditions set out in that subsection are not met. The effect of this provision is that the registered status that was automatically conferred on the plan by virtue of subsection 146.4(2) is rescinded retroactively to the time when the plan was entered into. (Refer to the commentary on subsection 146.4(2) for further information.)

Under paragraph 146.4(3)(a), the issuer is required, within 60 days of the plan being entered into, to notify the "specified Minister" (i.e., the Minister of Human Resources and Social Development) of the plan’s existence, and to do so in prescribed form containing prescribed information.

If, at the time the plan was entered into, the beneficiary was a beneficiary under another registered disability savings plan, paragraph 146.4(3)(b) requires that the other plan be terminated within 120 days of the new plan being entered into (or by such later day as the specified Minister considers reasonable in the circumstances). If the pre-existing plan is not terminated within the specified timeframe, it maintains its registered status, but the registration of the new plan is nullified by the application of this subsection. This ensures that, except for the time that it takes to process a transfer from one issuer to another, a beneficiary should not have more than one registered disability savings plan at any given time.

Plan conditions

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146.4(4)

New subsection 146.4(4) of the Act sets out conditions applicable to registered disability savings plans.

In order for a disability savings plan to be a registered disability savings plan, new paragraph 146.4(2)(a) requires that the issuer have received prior notification from the Minister of National Revenue that, in the Minister’s opinion, a plan identical to the plan would, if entered into, comply with the conditions in this subsection.

In order for a registered disability savings plan to maintain its registered status, new paragraph 146.4(11)(a) of the Act (in conjunction with new subsection 146.4(10) of the Act) requires that the plan continue to comply with the conditions in this subsection. Failure to administer a registered disability savings plan in accordance with its terms will also generally cause the plan to be deregistered. (Refer to the commentary on subsections 146.4(10) to (12) for further information.)

ITA
146.4(4)(a)

Under new paragraph 146.4(4)(a) of the Act, a registered disability savings plan must stipulate that it is to be operated exclusively for the benefit of the beneficiary. Given the difficulty inherent in having to determine if a registered disability savings plan is always being administered in accordance with this particular plan term, failure to so administer will not cause the plan to be deregistered. However, if the beneficiary (or the beneficiary’s legal representative) is of the opinion that the plan is not being operated exclusively for the benefit of the beneficiary, this explicit provision in the plan should assist in seeking legal recourse for the beneficiary to acquire control of the plan from the existing holders.

Paragraph 146.4(4)(a) also requires that the plan stipulate that the designation of the beneficiary is irrevocable, and that no right of the beneficiary to receive payments from the plan is capable of surrender or assignment.

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146.4(4)(b) to (e)

New paragraphs 146.4(4)(b) to (e) contain rules relating to holders of a disability savings plan.

Paragraph 146.4(4)(b)

Paragraph 146.4(4)(b) requires that the plan allow an entity to acquire rights as a successor or assignee of a holder of the plan only if the entity is one of the following:

Upon acquiring such rights, the successor or assignee becomes a holder of the plan. (Refer to the commentary on the definitions "holder" and "qualifying person" in subsection 146.4(1) for further information.)

Paragraph 146.4(4)(c)

Paragraph 146.4(4)(c) requires that the plan provide that an entity (other than a legal parent) cease to be a holder of the plan if the entity ceases to be a qualifying person in relation to the beneficiary. Assume, for example, that an individual who is the guardian of an orphaned minor child with a physical impairment establishes a disability savings plan for the child. The plan must provide for the individual to cease to be a holder of the plan if, and when, the individual ceases to be the child’s guardian (e.g., when the child reaches the age of majority). Paragraph 146.4(4)(d) requires that the plan terms anticipate this eventuality and provide for a successor planholder.

The exclusion of legal parents from this requirement allows (but does not require) a plan established by a legal parent when the child was a minor to continue being controlled by the parent after the beneficiary reaches the age of majority, regardless of the beneficiary’s capacity.

Paragraph 146.4(4)(d)

Paragraph 146.4(4)(d) requires that the plan provide for there to be at least one planholder at all times. Consequently, the plan terms must anticipate the possibility that a holder will cease to be a holder – because, for example, the holder has died or is no longer permitted, by virtue of paragraph 146.4(4)(c), to be a planholder – and provide a means of establishing a successor planholder. (See the commentary on paragraph 146.4(4)(b) for a description of those entities that are permitted to become successor holders of the plan.) Paragraph 146.4(4)(d) states that the plan may provide for the beneficiary (or the beneficiary’s estate) to automatically acquire rights as a successor or assignee of a planholder in order to ensure compliance with this requirement. (The legal representative of an incompetent beneficiary acquiring such rights may, within the constraints of the laws governing the legal representative, exercise those rights on behalf of the beneficiary.)

Paragraph 146.4(4)(e)

Paragraph 146.4(4)(e) requires a plan to prohibit a new holder from exercising their rights as a holder (except to the extent otherwise permitted by either the Minister or the specified Minister) until such time as the issuer has been advised of the entity having become a holder and been provided with the new holder’s Social Insurance Number or business number, as the case may be.

When an entity becomes a holder of a disability savings plan after the plan is entered into, the issuer is required, under new paragraph 146.4(13)(a), to so inform the specified Minister no later than 60 days after the later of the day on which the issuer is advised of the entity having become a holder and the day on which the issuer is provided with the new holder’s Social Insurance Number or business number, as the case may be.

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146.4(4)(f) to (h)

New paragraphs 146.4(4)(f) to (h) contain restrictions on contributions to a registered disability savings plan. (By virtue of the definition "contribution" in subsection 146.4(1), these restrictions do not apply to grants and bonds paid into the plan under the Canada Disability Savings Act.)

Paragraph 146.4(4)(f)

Paragraph 146.4(4)(f) requires that the plan prohibit contributions from being made in a year in respect of which the beneficiary is no longer a DTC-eligible individual. (Refer to the commentary on the definition "DTC-eligible individual" in subsection 146.4(1) for further information.) It also requires that the plan prohibit contributions after the death of the beneficiary.

Paragraph 146.4(4)(g)

Paragraph 146.4(4)(g) requires that the plan prohibit contributions from being made after the year in which the beneficiary turns 59 years of age, or at a time when the beneficiary is not resident of Canada. It also requires that the plan prohibit a contribution from being made if the total of the contribution and all other contributions to registered disability savings plans of the beneficiary would exceed $200,000. The prohibitions in paragraph 146.4(4)(g) do not apply to contributions made by way of a transfer made in accordance with new subsection 146.4(8).

Paragraph 146.4(4)(h)

Paragraph 146.4(4)(h) requires that the plan prohibit contributions by an entity that is not a holder of the plan, except with the written consent of a holder of the plan. This allows the holder to schedule contributions so as to maximize access to grants payable under the Canada Disability Savings Act and to ensure that contributions are in compliance with the requirements set out in paragraphs 146.4(4)(f) and (g).

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146.4(4)(i) to (n)

New paragraphs 146.4(4)(i) to (n) contain requirements relating to payments from a registered disability savings plan.

Paragraph 146.4(4)(i)

Paragraph 146.4(4)(i) requires that the plan provide that no payments may be made from the plan other than

Paragraph 146.4(4)(j)

Paragraph 146.4(4)(j) requires that the plan prohibit a disability assistance payment being made from the plan if the payment would cause the value of the plan’s assets to fall below the assistance holdback amount. (See the commentary on the definition "assistance holdback amount" in subsection 146.4(1) for further information). The purpose of this provision is to ensure that the plan has sufficient assets to satisfy any potential repayment obligations under the Canada Disability Savings Act.

Paragraph 146.4(4)(k)

Paragraph 146.4(4)(k) requires that the plan provide for lifetime disability assistance payments to commence no later than the end of the year in which the beneficiary turns 60 years of age. Subsection 146.4(1) defines "lifetime disability assistance payments" as disability assistance payments (simply, payments from the plan to the beneficiary) that are identified under the terms of the plan to be lifetime disability assistance payments and that, once they begin to be paid, are payable at least annually until the beneficiary dies or the plan is terminated. Paragraph 146.4(4)(l) sets a limit on the total amount of lifetime disability assistance payments that can be made in any year. (See the commentary on that paragraph for further information.)

If the plan is established in the year the beneficiary turns 60 years of age or a later year (which could occur only if the plan is being set up to receive funds transferred from another registered disability savings plan of the beneficiary), paragraph 146.4(4)(k) does not require the plan to provide for the commencement of lifetime disability assistance payments until the end of the year following the year in which the plan is established. (The plan may, however, be required to make disability assistance payments in the year of transfer to satisfy an undertaking referred to in paragraph 146.4(8)(d).)

Paragraph 146.4(4)(l)

Paragraph 146.4(4)(l) requires that the plan limit the total amount of lifetime disability assistance payments that can be made in any given year to the amount determined in accordance with the formula set out in that paragraph. The application of the formula allows the payment of the assets of the plan to be spread out relatively evenly over the remainder of the beneficiary’s lifetime. The annual limit imposed under paragraph 146.4(4)(l) does not apply if the year in question is a "specified year" for the plan (as defined in subsection 146.4(1)). Generally speaking, if the issuer of the plan has been provided with the certification of a medical doctor that the beneficiary is not likely to survive more than 5 years, the year of certification and the following five years are specified years.

The formula set out in paragraph 146.4(4)(l) is as follows:

A/(B + 3 – C) + D

Variable A is generally the fair market value of the plan’s assets at the beginning of the year. However, if the plan holds a "locked-in" annuity (as described below), that annuity is disregarded in determining the value of the plan’s assets.

Variable B is the greater of 80 and the beneficiary’s age in whole years at the beginning of the year for which the limit is being determined.

Variable C is the beneficiary’s age in whole years at the beginning of the year for which the limit is being determined.

After the beneficiary attains 80 years of age, the annual limit on lifetime disability assistance payments determined under this formula will be one-third of the value of the plan’s assets at the beginning of the year (assuming that the plan does not hold a locked-in annuity as referred to in the description of D below).

Variable D applies only if, at the beginning of the year for which the limit is being determined, the plan trust holds an annuity (referred to in this commentary as a "locked-in" annuity) that is described in paragraph (c) – but not in paragraph (b) – of the definition "qualified investment" in new subsection 205(1). An annuity described in paragraph (c) of that definition is also described in paragraph (b) only if the holder has the right to surrender the annuity at any time. Where the plan trust holds a locked-in annuity at the beginning of the year, variable D is the total amount of periodic payments received by the trust in the year under the annuity. If the trust disposed of the right to such payments in the year for which the limit is being determined, variable D is an estimate of the payments that the trust would otherwise have received. This ensures that, where a trust governed by a registered disability savings plan holds a locked-in annuity, the annual limit on lifetime disability assistance payments will never be less than the annuity payments to be received by the trust in that year.

By virtue of subsections 146.4(6) and (7), the beneficiary is required to include in income for a year the taxable portion of each lifetime disability assistance payment received in the year. (Refer to the commentary on those subsections for more information.)

The amount determined by the formula in paragraph 146.4(4)(l) is also relevant for paragraph 146.4(4)(n). (Refer to the commentary on that paragraph for further information.)

Paragraph 146.4(4)(m)

Paragraph 146.4(4)(m) requires that the plan specify whether or not disability assistance payments that are not lifetime disability assistance payments are permitted.

Paragraph 146.4(4)(n)

Paragraph 146.4(4)(n) requires that the plan contain certain provisions that will apply in a particular calendar year, if the total of all grants and bonds paid under the Canada Disability Savings Act into all registered disability savings plans of the beneficiary in all previous calendar years exceeds the total of all private contributions paid into all such plans in all such years. These plan provisions serve to impose limits on, and ensure that the beneficiary has certain rights relating to, disability assistance payments that may be made in the particular calendar year (which is referred to, in these notes, as the "restricted year").

Under subparagraph 146.4(4)(n)(i), the plan must (regardless of the beneficiary’s age in the restricted year) limit the total amount of disability assistance payments that can be paid to the beneficiary in the restricted year to the amount determined for that year under the formula set out in paragraph 146.4(4)(l). In other words, the limit that would otherwise apply to lifetime disability assistance payments, if any, made from the plan in the restricted year applies instead to all disability assistance payments made from the plan in that year (whether as lifetime disability assistance payments or otherwise). In applying this maximum limit on withdrawals, certain payments made from the plan following a transfer of funds from another registered disability savings plan of the beneficiary are disregarded.

The maximum annual withdrawal limit imposed under subparagraph 146.4(4)(n)(i) does not apply if the year in question is a "specified year" for the plan (as defined in subsection 146.4(1)). Generally speaking, if the issuer of the plan has been provided with the certification of a medical doctor that the beneficiary is not likely to survive more than 5 years, the year of certification and the following five years are specified years. Nor does the limit apply to payments made to the beneficiary’s estate.

If the beneficiary attained 59 years of age before the restricted year, subparagraph 146.4(4)(n)(ii) creates a minimum annual withdrawal requirement. Specifically, it requires that the plan provide for the total of all disability assistance payments made to the beneficiary in the restricted year (whether as lifetime disability assistance payments or otherwise) to be not less than the amount determined for that year under the formula set out in paragraph 146.4(4)(l). The interaction of this subparagraph with subparagraph 146.4(4)(n)(i) means that, for years after the beneficiary attains 59 years of age, the plan must provide for annual disability assistance payments that are no more than, and no less than, the amount determined for the year under the formula set out in paragraph 146.4(4)(l).

The requirements of subparagraph 146.4(4)(n)(ii) do not apply to the extent that the value of the plan’s assets are insufficient to satisfy the minimum payment requirement. This could be the case, for example, where the value of the assets decline precipitously during the restricted year, or where there has been a transfer to a new registered disability savings plan of the beneficiary in the restricted year and the receiving plan undertakes (in accordance with the requirements of paragraph 146.4(8)(d)) to make any residual payments that the transferring plan would otherwise have been required to make in that year. Nor do the requirements of subparagraph 146.4(4)(n)(ii) apply to disability assistance payments made to the beneficiary’s estate.

If the beneficiary attained 27 years of age but not 59 years of age before the restricted year, subparagraph 146.4(4)(n)(iii) requires that the plan provide the beneficiary with the right to direct that disability assistance payments be made from the plan to the beneficiary in the restricted year. The minimum age requirement is intended to ensure that beneficiary-directed disability assistance payments do not trigger a repayment of grants and bonds paid into the plan while the beneficiary was a minor.

In providing the beneficiary with this right, the plan must ensure compliance with the constraints imposed by paragraph 146.4(4)(j) and subparagraph 146.4(4)(n)(i). This means that a beneficiary-directed payment cannot be made if the payment would cause the value of the plan’s assets to fall below the assistance holdback amount. It also means that beneficiary-directed payments, when added to all other disability assistance payments made to the beneficiary in the restricted year (whether as lifetime disability assistance payments or otherwise), must not exceed the amount determined for that year under the formula set out in paragraph 146.4(4)(l).

Subparagraph 146.4(4)(n)(iii) will be of relevance primarily to an adult beneficiary who would otherwise have little or no say in the amount and timing of disability assistance payments to be made from the plan, typically because the plan was established by the beneficiary’s parents when the beneficiary was a minor. (The legal representative of an incompetent beneficiary acquiring such rights may, within the constraints of the laws governing the legal representative, exercise those rights on behalf of the beneficiary.)

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146.4(4)(o)

Paragraph 146.4(4)(o) requires the plan to provide that the issuer will, when directed to do so by the holders of the plan, transfer all the property held by the plan trust (or an amount equal to its value) to another registered disability savings plan of the beneficiary, together with all information in the issuer’s possession that may be considered necessary for the new plan to comply with the requirements of this Act and with any conditions and obligations imposed under the Canada Disability Savings Act.

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146.4(4)(p)

Paragraph 146.4(4)(p) deals with the termination of the plan following the beneficiary’s death or cessation of DTC eligibility.

Specifically, if, in respect of a particular year following the year in which the plan was entered into, the beneficiary fails to qualify as a "DTC-eligible individual" (as defined in subsection 146.4(1)), the plan must provide for any amounts remaining in the plan (after taking into account any repayments under the Canada Disability Savings Act) to be paid to the beneficiary, and for the plan to be terminated, by the end of the year following the particular year. Although the plan must provide for termination within this timeframe, paragraph 146.4(12)(d) allows the Minister to effectively suspend the requirement for termination, if the beneficiary’s DTC status is uncertain or in dispute, until such time as the issue is resolved. (Refer to the commentary on that paragraph for further information.)

Similarly, in the event of the beneficiary’s death, the plan must provide for any amounts remaining in the plan (after taking into account any repayments under the Canada Disability Savings Act) to be paid to the beneficiary’s estate, and for the plan to be terminated, by the end of the year following the year of the beneficiary’s death.

Trust not taxable

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146.4(5)

New subsection 146.4(5) of the Act generally provides that no income tax is payable by a trust governed by a registered disability savings plan. However, there are situations in which the trust is taxable.

Taxation of disability assistance payments

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146.4(6)

New subsection 146.4(6) of the Act provides for a portion of each disability assistance payment made from a registered disability savings plan to be included in the income of the beneficiary for the year in which the payment is made. If the beneficiary is not alive at that time, the amount is included in the income of the beneficiary’s estate for the year of the payment.

The amount included in income under this subsection is the amount by which the payment exceeds the non-taxable portion of the payment as determined under new subsection 146.4(7). In general terms, the proportion of the payment that is non-taxable is the same as the proportion that total contributions is to the total value of the plan’s assets.

This provision, in effect, allows contributions to be paid out of the plan on a tax-free basis (recognizing that contributions are not deductible), while taxing grants and bonds paid into the plan under the Canada Disability Savings Act and investment income earned in the plan.

Non-taxable portion of disability assistance payment

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146.4(7)

New subsection 146.4(7) of the Act sets out the manner for determining the non-taxable portion of a disability assistance payment for the purpose of new subsection 146.4(6).

In general terms, the proportion of a disability assistance payment that is non-taxable is the same as the proportion that total contributions is to the total value of the plan’s assets. More specifically, the non-taxable portion of a disability assistance payment is the amount determined by the formula

A x B/C

Variable A is the amount of the disability assistance payment.

Variable B, in general terms, represents the contributions paid to registered disability savings plans of the beneficiary that have not been used in determining the non-taxable portion of previous disability assistance payments, i.e., the running balance of amounts that remain to be withdrawn on a non-taxable basis. More specifically, Variable B is the amount by which contributions previously made to registered disability savings plans of the beneficiary exceed the non-taxable portions of all disability assistance payments previously made from registered disability savings plans of the beneficiary.

Variable C is the amount by which the value of the plan’s assets immediately before the payment exceeds the assistance holdback amount in relation to the plan. The exclusion of the assistance holdback amount reflects the conditional nature of grants and bonds paid under the Canada Disability Savings Act for the 10-year period following the payment of the grant or bond into the plan.

Subsection 146.4(7) provides that the amount determined thereunder will never be greater than the amount of the disability assistance payment. This deals with the fact that, in certain circumstances, the value of Variable B may exceed the value of Variable C. In such circumstances, the non-taxable portion of the disability assistance payment would, but for this provision, exceed the amount of the payment itself. While this would have no impact on the taxation of the payment – it would be fully non-taxable under subsection 146.4(6) – it would unfairly reduce the running balance of amounts that can subsequently be withdrawn on a tax-free basis.

Transfer of funds

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146.4(8) and (9)

New subsections 146.4(8) and (9) of the Act provide rules governing transfers from one registered disability savings plan of a beneficiary to another.

The transfer of an amount from a registered disability savings plan of a beneficiary is in accordance with subsection 146.4(8) if the conditions set out in that subsection are met. These conditions are as follows:

In accordance with the registration condition in new paragraph 146.4(4)(i), a transfer in accordance with subsection 146.4(8) is one of three types of payments that a registered disability savings plan is permitted to make.

New subsection 146.4(9) of the Act provides that a transfer from a registered disability savings plan in accordance with subsection 146.4(8) will not (solely because of the transfer) be included in any taxpayer’s income.

Non-compliance – Cessation of registered status

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146.4(10) to (12)

New subsections 146.4(10) to (12) of the Act contain provisions dealing with non-compliant registered disability savings plans.

Subsection 146.4(10) describes the consequences of a registered disability savings plan being non-compliant; subsection 146.4(11) sets out the circumstances in which a plan is considered to be non-compliant; and subsection 146.4(12) provides authority for the Minister of National Revenue to modify the application of subsection 146.4(11).

Subsection 146.4(10)

Subsection 146.4(10) outlines the consequences of a registered disability savings plan becoming non-compliant.

If a registered disability savings plan becomes non-compliant at any time, it loses its registered status, as of that time, by virtue of the application of paragraph 146.4(10)(a).

If a plan loses its registered status under paragraph 146.4(10)(a), paragraph 146.4(10)(b) deems the plan to have made a disability assistance payment to the beneficiary (or, if the beneficiary is deceased, to the beneficiary’s estate) immediately before the deregistration of the plan. The deemed payment is equal to the value of the plan’s assets immediately before deregistration less the "assistance holdback amount" in relation to the plan as defined in subsection 146.4(1). (The exclusion of the assistance holdback amount is in recognition of the fact that the plan will be required by the Canada Disability Savings Act to repay this amount to the government.) By virtue of subsection 146.4(6), the taxable portion of this deemed payment is included in the income of the beneficiary (or the beneficiary’s estate) for the year in which the payment is deemed to have been made.

If a plan becomes deregistered under paragraph 146.4(10)(a) because all or part of the assistance holdback amount in relation to the plan is included in a disability assistance payment in contravention of paragraph 146.4(4)(j), paragraph 146.4(10)(c) deems the plan to have made an additional disability assistance payment equal to the portion of the assistance holdback amount so paid out. As in paragraph 146.4(10)(b), the payment is deemed to have been made immediately before the plan’s deregistration, and to have been made to the beneficiary or the beneficiary’s estate, as the case may be. Paragraph 146.4(10)(c) also deems the non-taxable portion of the payment to be nil, which results in the whole amount of the deemed payment being included in income. New paragraph 60(z) of the Act provides for an offsetting deduction on repayment of this amount to the government.

Subsection 146.4(11)

Subsection 146.4(11) of the Act describes the circumstances in which a registered disability savings plan is considered to be non-compliant.

A registered disability savings plan is non-compliant under paragraph 146.4 (11)(a) at any time at which it fails to comply with a condition in subsection 146.4(4).

A registered disability savings plan is non-compliant under paragraph 146.4(11)(b) at any time at which there is a failure to administer the plan in accordance with its terms. An exception is made for a failure to administer the terms of the plan which stipulate – as required by new subparagraph 146.4(4)(a)(i) – that the plan is to be operated exclusively for the benefit of the beneficiary. This exception recognizes the difficulty inherent in determining if a registered disability savings plan is being operated exclusively for the benefit of the beneficiary. Although such a failure will not cause the plan to become non-compliant, the explicit inclusion of this stipulation in the plan terms should assist the beneficiary (or the beneficiary’s legal representative) in seeking legal recourse to acquire control of the plan if they have reason to believe that the plan is not being operated exclusively for the beneficiary’s benefit.

A registered disability savings plan is non-compliant under paragraph 146.4(11)(c) at any time at which a person fails to comply with a condition or an obligation imposed under the Canada Disability Savings Act, but only if the specified Minister (i.e., the Minister of Human Resources and Social Development) is of the opinion that the plan should be considered non-compliant (and thus deregistered) because of the failure, and so notifies the Minister of National Revenue.

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