Archived - Explanatory Notes to Legislative Proposals Relating to Income Tax: 4

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Clause 128

Definition "mutual fund trust"

ITA
132(6)(c)

Subsection 132(6) of the Act sets out the definition "mutual fund trust". Under paragraph 132(6)(c), a trust will qualify at any time as a mutual fund trust only if at that time it meets prescribed conditions relating to the number of its unit holders, dispersal of ownership of trust units issued by it and public trading of trust units issued by it.

Paragraph 132(6)(c) is amended so that the prescribed conditions that a trust may be required to satisfy in order to qualify as a mutual fund trust are not limited to those relating to ownership and trading of its units.

This amendment applies to the 2000 and subsequent taxation years.

The regulations setting out these prescribed conditions for a mutual fund trust are found in Part XLVIII of the Income Tax Regulations. In particular, Regulation 4801 sets out conditions that apply to a class of units issued by a trust in order for the trust to be considered a mutual fund trust. It is intended that proposed amendments to Part XLVIII of the Regulations would include the following:

These amendments to the Regulations would, except as described above, be proposed to apply to the 2000 and subsequent taxation years of trusts.

Clause 129

Taxation Year of Mutual Fund Trust

ITA
132.11(1)

Section 132.11 of the Act generally allows a mutual fund trust to elect to have taxation years that end on December 15, rather than on December 31.

Where a trust makes this election, each subsequent taxation year of the trust is deemed to start on December 16 of a calendar year and to end on December 15 of the following calendar year, unless any of certain events intervenes. One of the events that can intervene, and that results in an earlier year-end, is a qualifying exchange under section 132.2 of the Act.

As a consequence of the restructuring of section 132.2, the reference in paragraph 132.11(1)(b) to paragraph 132.2(1)(b) is replaced by a reference to paragraph 132.2(3)(b).

This amendment applies after 1998 except that, in applying the amended version of paragraph 132.11(1)(b) to taxation years that end before 2000, the paragraph is to be read as though it did not contain the words "subject to subsection (1.1)".

Paragraph 132.11(1)(c) generally provides that each fiscal period of a mutual fund trust that has made an election under subsection 132.11(1) shall end no later than the end of the trust’s taxation year that ends on December 15th.

The French-language version of paragraph 132.11(1)(c) is amended to clarify that the paragraph applies to each fiscal period of the trust that either begins in a taxation year of the trust that ends on December 15 because of an election under paragraph 132.11(1)(a) or that ends in a subsequent taxation year of the trust. This technical change does not represent a change in policy.

This amendment applies to the 1998 and subsequent taxation years.

Amounts Paid or Payable to Beneficiaries

ITA
132.11(4)

Subsection 132.11(4) of the Act is designed to permit distributions made in the last 16 days of a calendar year in respect of a trust's taxation year ending on December 15 of the calendar year to be treated as if they were made at the end of that taxation year.

Subsection 132.11(4) of the Act is amended so that it applies for the purpose of paragraph (i) of the definition "disposition" in subsection 248(1). As a result, in the case of a mutual fund trust that has elected under section 132.11 to have a December 15th taxation year-end, distributions from the trust in respect of a taxpayer's capital interest made in the last 16 days of a calendar year will not result in a disposition of the interest.

This amendment applies to amounts that, after 1999, are paid or have become payable by a trust.

Clause 130

Mutual Fund Qualifying Exchanges

ITA
132.2

Section 132.2 of the Act provides rules to allow two mutual fund trusts, or a mutual fund trust and a mutual fund corporation, to merge on a tax-deferred basis. Such a merger is referred to as a "qualifying exchange".

In addition to introducing several substantive improvements to the rules in section 132.2, these amendments restructure the provision as a whole. In general terms, the section is now organized as follows: new subsection 132.2(1) sets out definitions that apply for the section; subsection (2) describes the order in which the events that make up a qualifying exchange are considered to have occurred; subsection (3) provides a set of general rules; subsection (4) deals with non-depreciable property that is transferred on the qualifying exchange; and subsection (5) deals with depreciable property that is transferred. Subsection (6) establishes the due date for the election to treat a transfer as a qualifying exchange; and subsection (7) provides authority for the Minister of National Revenue to allow that election to be amended or revoked.

Despite this restructuring, the basic principles of section 132.2 remain unchanged, as do most aspects of its operation. The exceptions – the areas where these amendments change the provision substantively – have to do with depreciable property that is transferred on a qualifying exchange, and with the election to treat a transaction as a qualifying exchange. Further modifications have been made to prevent the creation of artificial or "phantom" losses, generally in circumstances where one fund holds units or shares of the other fund immediately before the transfer time.

Transfers of Depreciable Property

In its current form, section 132.2 does not deal comprehensively with transfers of depreciable property between mutual funds. In particular, the deemed timing of the transfer, in relation to the deemed year-end of the funds, may prevent either fund from claiming capital cost allowance (CCA) for the last taxation year that began before the qualifying exchange. The transferor has disposed of the property two moments before the end of its year, and the transferee will not acquire it until the last moment of its own year.

To ensure that one CCA claim is available for that last year, new subsection 132.2(5) provides a special regime for qualifying exchanges that include transfers of depreciable property. A key aspect of these special rules is the ordering of events in accordance with new subsection 132.2(2). That subsection provides that, starting with the actual (i.e., legal) transfer of property between a transferor fund and a transferee fund that carry out a qualifying exchange, the following series of times occurs, each immediately after the previous one:

Name of Time

Description

Reference


the transfer time

The actual transfer of the property between the funds takes place.

definition "qualifying exchange" in 132.2(1)

the first intervening time

The funds are treated as having disposed of and reacquired non-transferred property (other than depreciable property).

132.2(3)(a)

the acquisition time

The transferee is treated as having acquired transferred property (other than depreciable property); the funds’ taxation years are treated as ending.

132.2(4)(a); 132.2(3)(b)

the beginning of the funds’ first post-exchange years

 

132.2(3)(b)

the depreciables disposition time

The transferor is deemed to have disposed of any transferred property that is depreciable property.

132.2(5)(a)

the second intervening time

The funds are treated as having disposed of and reacquired any non-transferred property that is depreciable property.

132.2(3)(c)

the depreciables acquisition time

The transferee is deemed to have acquired any transferred property that is depreciable property.

132.2(5)(b)

As a result of this timing, the transferor fund will be treated as owning, until after its first post-exchange year has begun, any depreciable property that is being transferred. This will ensure that the transfer does not prevent the transferor from deducting CCA in respect of property of that class, for its taxation year that ends at the acquisition time. The new rule also ensures that the transferee does not duplicate that deduction, by treating the transferee as having acquired the property only after its new taxation year has begun.

This treatment of depreciable property applies, along with most aspects of the restructuring of section 132.2, to qualifying exchanges that take place after 1998.

Timing of Election

For section 132.2 to apply to a transfer of property between mutual funds, the definition "qualifying exchange" currently requires the funds to file their joint election in prescribed form with the Minister of National Revenue within six months after the transfer time. This timing requirement is changed to allow greater flexibility. The amended definition "qualifying exchange" requires that the funds’ election be made before the election’s "due date", defined in new subsection 132.2(6) to mean either the day that is six months after the day that includes the transfer time or any later day that the Minister accepts, on joint application by the funds. An example of a case in which the Minister might accept such an application would be one in which the Minister has already decided to accept a late filing of the funds’ returns of income for the taxation year that includes the qualifying exchange.

In certain cases, mutual funds that have elected to treat a transfer as a qualifying exchange may wish to amend, or even revoke, their election. New subsection 132.2(7) allows the funds to do this, on joint application and with the permission of the Minister.

New subsections 132.2(6) and (7), and the amended definition "qualifying exchange" in subsection 132.2(1), apply to qualifying exchanges that take place after June 1994.

Definition "designated beneficiary"

Rules of General Application

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132.2(3)(g)(iii) and 132.2(1)(j)(iii)

New subparagraph 132.2(3)(g)(iii) of the Act applies in determining whether a person is a "designated beneficiary" (as defined in section 210 of the Act) of a trust. Under the definition designated beneficiary, certain persons or partnerships that are beneficiaries under a trust may be treated (or may cause trusts or partnerships of which they are beneficiaries or members to be treated) as designated beneficiaries under the trust, unless the relevant interest in the trust is held at all times by the person or partnership, as the case may be, or by another person exempt because of subsection 149(1) of the Act from tax, under Part I of the Act, on all of the other person's taxable income.

In a qualifying exchange, a mutual fund trust or mutual fund corporation (transferor) transfers all or substantially all of its property to another mutual fund trust (transferee) and takes back units of the transferee. Those units are then provided by the transferor to its investors in exchange for their shares or units of the transferor. New subparagraph 132.2(3)(g)(iii) ensures that, in these circumstances, the transferor is treated, for the purpose of the definition designated beneficiary, as not having held the units of the transferee.

This amendment applies for qualifying exchanges that occur after 1998. A similar rule, in former subparagraph 132.2(1)(j)(iii), applies for qualifying exchanges that occurred after June 1994 and before 1999.

Rules of General Application - Losses

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132.2(3)(f) and (g)

New paragraphs 132.2(3)(f) and (g) of the Act are amended to ensure that the mutual fund merger rules do not apply inappropriately to create artificial or "phantom" losses. Although the changes reflected in these new provisions are not expected to be relevant to most qualifying exchanges, the following is a description of their purpose and effect.

Under the definition "qualifying exchange" in new subsection 132.2(1), all or substantially all of the outstanding shares issued by the transferor must be disposed of to the transferor within the 60 days after the transfer time, and every person so disposing of shares of the transferor must receive only units of the transferee as consideration. The second leg of a qualifying exchange is thus a set of transactions in which the transferor’s investors replace their shares of the transferor with units of the transferee. The tax effect of those transactions are governed by paragraphs 132.2(1)(f) and (g). For clarity, these notes reflect the legislation by referring to investments in the transferor – whether a corporation or a trust – as shares, reserving the term "units" to refer to the units of the transferee mutual fund trust.

Existing paragraph 132.2(1)(i) provides that if, within 60 days after the transfer time, the transferor fund disposed of units of the transferee in exchange for shares of itself, its proceeds of disposition are deemed to be nil. Since the units acquired by the transferor in return for its property are deemed, under existing paragraph 132.2(1)(h) (now new paragraph 132.2(3)(e)), also to have had a cost of nil, this provision allows the transferor to roll those units out to its investors with no tax consequences to it. New paragraph 132.2(3)(f) provides that if, within 60 days after the transfer time, the transferor fund disposes of units of the transferee in exchange for shares of itself, its proceeds of disposition will be deemed to be equal to the cost amount of the units to the transferor immediately before the disposition. This change – from nil proceeds to proceeds equal to cost amount – ensures appropriate results if the transferor held units of the transferee that were acquired otherwise than as a result of the qualifying exchange. In this situation, that first tranche of units will have a cost base that, pursuant to section 47 of the Act, will be averaged with the second tranche of units (i.e. the units that the transferor acquired in the qualifying exchange). Existing paragraph 132.2(1)(i) deems the proceeds of the disposition of the second tranche of units to be nil, an inappropriate result in that it creates a phantom loss. New paragraph 132.2(3)(f), deeming the proceeds of disposition equal to the cost amount of the units to the transferor immediately before the disposition, ensures that the transferor can still roll units of the transferee out to its investors with no tax consequences to it, and avoids the creation of a phantom loss.

Existing subparagraph 132.2(1)(j)(i) provides that, where a taxpayer disposes of shares of the transferor in exchange for units of the transferee within that same 60-day period, both the taxpayer’s proceeds of disposition of the shares and the taxpayer’s cost of the units are deemed to be equal to the cost amount of the shares immediately before the transfer time. New subparagraph 132.2(3)(g)(i) provides that, where a taxpayer disposes of shares of the transferor in exchange for units of the transferee within that same 60-day period, both the taxpayer’s proceeds of disposition of the shares and the taxpayer’s cost of the units are deemed to be equal to the cost amount of the shares immediately before the disposition. This change – from measuring the cost amount of the shares immediately before the transfer time to measuring it immediately before the disposition – ensures that the transferor’s investors will not realize any gain or loss on their exchange of their shares for units of the transferee.

Paragraph 132.2(3)(g) also includes a new subparagraph 132.2(3)(g)(iv) to address the disposition by certain persons or partnerships of the units in the transferee that they received on the qualifying exchange. Those affected by this new provision are those who, when they acquire the units, are affiliated with one or both of the funds. This could include, for example, the transferee itself, or a corporation it controls.

The subparagraph first deems the units received in the qualifying exchange not to be identical to any other units of the transferee. This segregates the new units from the averaging effect of section 47 of the Act.

Next, the subparagraph specifies the effects of disposing of the new units. If the taxpayer is the transferee, and the units cease to exist when the taxpayer acquires them (if, for example, the units are cancelled immediately on receipt), clause 132.2(3)(g)(iv)(B) provides two effects. First, to prevent any possible question in this regard, the taxpayer is deemed to have acquired those units. This ensures, among other things, that subparagraph (i) establishes the taxpayer’s cost of the units. Second, the taxpayer is treated as having disposed of those units immediately after it acquired them, for proceeds of disposition equal to the cost amount to the taxpayer of those units at that time. This ensures, for greater certainty, that a transferee that had an investment in the transferor prior to the qualifying exchange will not incur a phantom loss as a result of exchanging its shares in the transferor in return for units of itself.

If the taxpayer is affiliated with one or both of the funds, but is not the transferee, clause 132.2(3)(g)(iv)(C) provides that, for the purpose of computing any gain or loss of the taxpayer from the taxpayer’s first disposition of each of those units, the proceeds of disposition of the unit will depend on whether the disposition is a renunciation or surrender of the unit or some other disposition.

New subclause 132.2(3)(g)(iv)(C)(I) provides that, if the disposition is a renunciation or surrender of the unit by the taxpayer for no consideration, and is not in favour of any person other than the transferee, the taxpayer’s proceeds of disposition of that unit are deemed to be equal to that unit’s cost amount to the taxpayer immediately before that disposition. This ensures that an affiliated taxpayer will never incur a phantom loss or gain on the renunciation or surrender of the unit.

If the disposition is not a renunciation or surrender of the unit described in subclause 132.2(3)(g)(iv)(C)(I), the affiliated taxpayer’s proceeds of disposition of that unit are deemed by subclause 132.2(3)(g)(iv)(C)(II) to be equal to the greater of that unit’s fair market value and its cost amount to the taxpayer immediately before that disposition. This ensures that the taxpayer will never incur a loss, including a phantom loss, on a disposition of one of those units, but may incur a gain.

Two additional points should be noted with respect to the operation of new subparagraph 132.2(3)(g)(iv).

New paragraphs 132.2(3)(f) and (g), together with the rest of new subsection 132.2(3), generally apply to qualifying exchanges that occur after 1998. A limited exception applies in respect of certain qualifying exchanges in respect of which a return of income, claiming the losses sought to be prevented by these amendments, was filed by the transferee mutual fund before Announcement Date.

Clause 131

Non-resident-owned Investment Corporations - Transition

ITA
134.1(2)

Section 134.1 of the Act was enacted, along with section 134.2, in 2001 to provide transitional relief for corporations that cease to be non-resident owned investment corporations (NROs). The essence of the relief provided in section 134.1 is to allow such a corporation to recover refundable tax by paying a dividend in its "first non-NRO year". In its current form, the section applies only in respect of dividends paid to a non-resident person or another NRO. There is, however, another kind of shareholder to whom an NRO may pay a dividend in respect of which it is appropriate to apply the section - a trust for the benefit of non-resident persons or their unborn issue. Since such a trust could, under the rules that have governed NROs themselves, have held the shares and debt of an NRO, a dividend to the trust ought to support a refund of the former NRO's refundable tax. Subsection 134.1(2) is therefore amended to include such dividends within the section's scope.

In addition, subsections 104(10) and (11) of the Act are added to the list of provisions in subsection 134.1(2) for which a former NRO is deemed to be an NRO during its first non-NRO year. Prior to the repeal of the NRO system, a trust that received a dividend from an NRO and that did not in turn distribute the amount of the dividend to its non-resident beneficiaries was entitled to deduct that amount from the trust's income under subsection 104(10). Subsection 104(11) then deemed the amount deducted under subsection 104(10) to have been paid to a non-resident beneficiary, with the result that Part XIII withholding tax would typically be payable. These two subsections are included in subsection 134.1(2) in order to allow a trust to benefit from these provisions in the year it receives the final payment of dividends from the former NRO.

Both of these amendments apply on the same basis as section 134.1: that is, to a corporation that ceases to be an NRO because of a transaction or event that occurs, or a circumstance that arises, in a taxation year of the corporation that ends after February 27, 2000.

Clause 132

Cooperative Corporations

ITA
136

Section 136 of the Act provides rules that apply to cooperative corporations.

Subsection 136(1) provides that a cooperative corporation that would otherwise be a private corporation is treated as a private corporation for the purposes of specified provisions of the Act. The subsection is amended to include among those provisions section 123.4 of the Act, which in effect provides reductions in corporate tax rates. This subsection is amended, for the 2001 and subsequent taxation years, to provide that a cooperative corporation that otherwise qualifies as a Canadian-controlled private corporation (CCPC) may use the special rate reduction provided for CCPCs.

Subsection 136(2) of the Act sets out conditions that a corporation must meet in order to be a cooperative corporation. The condition in current paragraph 136(2)(c) has two parts: at least 90% of its members must be individuals, other cooperative corporations, or corporations or partnerships that carry on the business of farming; and at least 90% of its shares, if any, must be held by those persons or partnerships.

The second part of this condition is modified to accommodate cases where the shares of a cooperative are held not only by the members themselves, but also by their registered plans (RRSPs, RRIFs, or RESPs). If shares are held by a trust that is governed by such a plan, provided a member of the cooperative is the plan’s subscriber or annuitant, as the case may be, those shares will be counted in the same way as if they were held by a member personally. Amended paragraph 136(2)(c) and new paragraph 136(2)(d), which give effect to this change, apply to the 1998 and subsequent taxation years.

Clause 133

Credit Unions

ITA
137(6)

"member"

Section 137 of the Act provides rules that apply to credit unions. Among the definitions set out in subsection 137(1) is "member," meaning essentially a member of record who is entitled to the services of the credit union. This definition is amended, for the 1996 and subsequent taxation years, to treat as a member a registered retirement savings plan, registered retirement income fund, or registered education savings plan, provided that the annuitant or subscriber under the plan is a person who meets the existing definition of "member".

Credit Union not Private Corporation

ITA
137(7)

Subsection 137(7) of the Act provides that a credit union that would otherwise be a private corporation is treated as a private corporation for the purposes of specified provisions of the Act. The subsection is amended to include among those provisions section 123.4 of the Act, which in effect provides reductions in corporate tax rates. This amendment, which applies to the 2001 and subsequent taxation years, provides that a credit union that otherwise qualifies as a Canadian-controlled private corporation (CCPC) may use the special rate reduction provided for CCPCs.

Clause 134

Deposit Insurance Corporations

ITA
137.1

Section 137.1 of the Act provides rules for the taxation of deposit insurance corporations (DICs), including rules that affect the computation of income. In general terms, the premiums that a member institution pays to a DIC are deductible in computing the member’s income and are not included in computing the income of the DIC, while any assistance that the DIC provides to the member or the member’s depositors is not deductible for the DIC and is included in computing the member’s income.

In certain circumstances, two or more DICs may share responsibilities toward a group of members. In such a case, it may be necessary for one DIC to pay to another an amount in respect of premiums. To ensure the appropriate tax consequences of such a payment, subsections 137.1(2) and (4) are amended. New paragraph 137.1(2)(b) excludes from the income of a DIC any amount it receives from another DIC, to the extent the amount can reasonably be considered to have been paid out of premiums or assessments received or receivable by the other DIC from its member institutions. New paragraph 137.1(4)(d), on the other hand, precludes the paying DIC from deducting the amount in computing its own income. These amendments apply to the 1998 and subsequent taxation years.

Clause 135

Insurance Corporations

ITA
138

Section 138 of the Act provides detailed rules relating to the taxation of insurance corporations.

Insurer’s Income or Loss

ITA
138(2)

Subsection 138(2) of the Act provides rules for the purpose of computing the income of a life insurer resident in Canada where the life insurer carries on an insurance business in Canada and in a country other than Canada. The subsection provides that the insurer’s income from carrying on an insurance business is the amount of its income from carrying in the insurance business in Canada computed in accordance with the Act. As well, the subsection provides that the insurer’s taxable capital gains and allowable capital losses from property used or held in the course of carrying on an insurance business is the insurer’s taxable capital gains and allowable capital losses from designated insurance property.

Subsection 138(2) is being amended to extend its application to non-resident insurer’s that carry on an insurance business in Canada. As well, it is being amended to provide, for greater certainty, the following:

1. In computing a multinational insurer’s income from an insurance business carried on by it in Canada, no amount is to be included in respect of the insurer’s gross investment revenue for a taxation year derived from property used or held in the course of carrying on an insurance business that is not designated insurance property of the insurer. Subsection 138(9) of the Act provides that in computing a multinational insurer’s income from an insurance business carried on by it in Canada the insurer must include its gross investment revenue for the year from its designated insurance property for the year plus the amount prescribed in respect of the insurer for the year. Designated insurance property is defined in section 2400 of the Income Tax Regulations.

2. In computing a multinational insurer’s taxable capital gains and allowable capital losses for the year from the disposition of property used or held in the course of carrying on an insurance business there is to be included the insurer’s taxable capital gains and allowable capital losses from dispositions of its designated insurance property for the year. It also provides that the insurer’s taxable capital gains and allowable capital losses for the year from the disposition of property used or held in the course of carrying on an insurance business that is its designated insurance property for the year are not to be included in computing a multinational insurer’s taxable capital gains and allowable capital losses for the year.

The amendments are applicable to taxation years that end after 1999.

Computation of Income of Non-resident Insurer

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138(11.91)

Subsection 138(11.91) of the Act provides rules for the purpose of computing the income of a non-resident insurer that at any time in a particular taxation year commences to carry on business in Canada or that ceases to be exempt from tax under Part I of the Act.

Paragraph 138(11.91)(f) of the English Version of the Act applies where the non-resident insurer's capital cost of a depreciable property exceeds the property’s fair market value immediately before the commencement of the particular taxation year. To ensure that on a later disposition of the property the non-resident insurer is subject to recapture of any excess capital cost allowance claimed before the particular taxation year, this paragraph preserves the property’s capital cost, and treats the excess as having been allowed as capital cost allowance.

Since it is inappropriate to provide for the recapture of capital cost allowance that was claimed when the business was not carried on in Canada or when the non-resident insurer was exempt from tax under Part I of the Act, paragraph 138(11.91)(f) of the English version of the Act is repealed.

Paragraph 138(11.91)(d) of the French version of the Act is repealed for the same reason.

This amendment applies to taxation years that end after 1999.

Clause 136

Mark-to-market Rules

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142.6(1)

Subsection 142.6(1) of the Act contains rules that apply where a taxpayer becomes (or ceases to be) a financial institution. This is most likely to happen where the change of status occurs because the taxpayer becomes (or ceases to be) controlled by a financial institution.

If a taxation year of the taxpayer does not end immediately before the time at which its status as a financial institution changes, subparagraph 142.6(1)(a)(i) deems the taxpayer's taxation year that would otherwise have included that time to end immediately before that time. A new taxation year begins at that time, and the taxpayer is permitted to adopt a new fiscal period. One purpose for the deemed year-end is to ensure the proper application, in taxation years in which the taxpayer is a financial institution, of the rules, commonly known as the mark-to-market rules,

The expressions "financial institution", "specified debt obligation" and "mark-to-market property" are defined in section 142.2 of the Act.

Paragraph 142.6(1)(b) applies where a taxpayer becomes a financial institution. This paragraph generally provides for a deemed disposition at fair market value of each property held by the taxpayer that is

This deemed disposition under paragraph 142.6(1)(b) is intended to ensure that amounts brought, because of the mark-to-market rules in sections 142.3 and 142.5, into the taxpayer's income for the taxpayer's subsequent taxation year (i.e., the taxation year that includes the time of the change of status) do not include gains or losses accrued before the beginning of that subsequent taxation year.

Paragraph 142.6(1)(b) is amended to ensure that this is achieved in connection with mark-to-market properties. Amended paragraph 142.6(1)(b) results in the taxpayer being deemed to have disposed of, immediately before the end of its particular taxation year that ends immediately before the time of the change of status, and for proceeds equal to its fair market value at the time of that disposition, a mark-to-market property of the taxpayer

Paragraph 142.6(1)(c) provides for a deemed disposition of specified debt obligations (other than mark-to-market property) in the opposite situation of change of status, i.e., where the taxpayer ceases to be a financial institution. Paragraph 142.6(1)(d) provides that the taxpayer is deemed to have reacquired, at the end of the taxation year referred to in paragraph 142.6(1)(b) or (c), each property deemed by that paragraph to have been disposed of by the taxpayer, at a cost equal to the proceeds of disposition of the property.

Consequential to the amendments to paragraph 142.6(1)(b), paragraph 142.6(1)(d) is amended to provide that the taxpayer is deemed to have reacquired, at the end of its taxation year that ends immediately before the time of the change of status, each property deemed by paragraph 142.6(1)(b) or (c) to have been disposed of by the taxpayer, at a cost equal to the proceeds of disposition of the property.

Amended paragraphs 142.6(1)(b) and (d) apply to taxation years that end after 1998.

Clause 137

Authorized Foreign Banks – Conversion

ITA
142.7(8)(d)

Section 142.7 of the Act provides time-limited rules to facilitate foreign banks' transformation of certain Canadian operations, currently carried out through subsidiaries, into Canadian branches (known as "authorized foreign banks") of the foreign banks themselves.

When an authorized foreign bank assumes certain debt obligations of its Canadian affiliates, subsection 142.7(8) applies to govern the tax consequences of the assumption.

Subparagraph 212(1)(b)(vii) of the Act provides an exemption from Part XIII tax in respect of interest payments on certain long- and medium-term corporate debt. The exemption can depend upon, among other things, the time at which a debt is issued. New paragraph 142.7(8)(d) is added to treat, for the purpose of subparagraph 212(1)(b)(vii), a debt obligation assumed by an authorized foreign bank from its Canadian affiliate as having been issued at the time that the debt was issued by the Canadian affiliate.

This amendment applies after June 27, 1999.

Clause 138

Communal Organizations

ITA
143

Section 143 of the Act sets out rules governing the taxation of communal organizations (referred to in that section as "congregations") that do not allow their members to own property in their own right.

Election in Respect of Gifts

ITA
143(3.1)

Subsection 143(3.1) of the Act allows a communal organization that makes an election under subsection 143(2) of the Act to elect to have its total charitable, Crown, cultural and ecological gifts flowed through to those members (the "participating" members) of the congregation for whom an amount is included in income for the year under subsection 143(2).

Subsection 143(3.1) is amended consequential to the addition of new subsection 248(31) of the Act, in respect of gifts made after December 20, 2002, to refer to the "eligible amount" of a gift made because of a person being a participating member in the communal organization.

Clause 139

Limited-recourse Debt in Respect of a Gift or Monetary Contribution

ITA
143.2(6.1)

New subsection 143.2(6.1) of the Act describes limited-recourse debt in respect of a gift or monetary contribution made after February 18, 2003. Such an amount is an advantage under subsection 248(32) of the Act, such that it reduces the eligible amount of a gift or political contribution determined under subsection 248(31) of the Act. For additional details regarding the amount of an advantage, see the commentary to new subsection 248(32).

A limited-recourse debt includes the unpaid principal of any indebtedness for which recourse is limited, even if that limitation applies only in the future or contingently. It also includes any other indebtedness of the taxpayer, related to the gift or contribution, if there is a guarantee, security or similar indemnity or covenant in respect of that or any other indebtedness. For example, if a donor (or any other person mentioned below) enters into a contract of insurance whereby all or part of a debt will be paid upon the occurrence of either a certain or contingent event, the debt is a limited-recourse debt in respect of a gift if it is in any way related to the gift.

Such an indebtedness is also a limited-recourse debt if it is owed by a person dealing non-arm's length with the taxpayer or by a person who holds an interest in the taxpayer.

Information Located Outside Canada

ITA
143.2(13)

Subsection 143.2(13) of the Act applies where information related to an indebtedness in respect of an expenditure is located outside Canada, and the Minister of National Revenue is not satisfied that the indebtedness is not a limited-recourse amount. In such a case, the indebtedness is deemed to be a limited-recourse amount in respect of the expenditure. Subsection 143.2(13) is extended to also apply in respect of an indebtedness that relates to a gift or political contribution made after February 18, 2003.

Clause 140

Registered Retirement Savings Plans

ITA
146

Section 146 of the Act provides rules relating to registered retirement savings plans (RRSPs).

Definitions

ITA
146(1)

"earned income"

Subsection 146(1) of the Act defines "earned income", which is relevant in determining the maximum tax-deductible contributions that a taxpayer may make to RRSPs. The definition includes references to a number of provisions that have previously been repealed or re-numbered. The definition is amended to remove these references and update the numbering, with application from the time the provisions were repealed or re-numbered.

Deemed Receipt of Refund of Premiums

ITA
146(8.1)

Subsection 146(8.1) of the Act deals with situations in which an amount paid from a deceased individual’s RRSP to the individual’s estate would have been a "refund of premiums" if it had been paid by the RRSP to a beneficiary under the estate. An amount paid out of an RRSP as a consequence of the death of the annuitant is defined, by subsection 146(1) of the Act, to be a "refund of premiums" if the recipient was, immediately before the death of the RRSP annuitant, a spouse or common-law partner of the annuitant or a financially dependent child or grandchild of the annuitant.

Subsection 146(8.1) allows the legal representative of a deceased RRSP annuitant’s estate and a qualifying beneficiary under the estate to elect jointly to have the RRSP proceeds that were paid to the estate treated as a refund of premiums received by the beneficiary from the RRSP. When such a election is made, the beneficiary is required to include the deemed refund of premiums in income. If a corresponding amount is used to acquire a qualifying annuity or is paid into an RRSP or registered retirement income fund of the beneficiary and certain other conditions are satisfied, the beneficiary will be entitled to an offsetting deduction under paragraph 60(l) of the Act.

Subsection 146(8.1) is amended to provide that the expression "beneficiary" under a deceased RRSP annuitant’s estate has the meaning assigned by subsection 108(1) of the Act. This has the effect of extending the provisions of subsection 146(8.1) to an individual who is "beneficially interested" in a deceased RRSP annuitant’s estate (as defined in subsection 248(25)), but who is not a beneficiary under the estate. This could occur, for example, where an individual has only an indirect interest in the deceased RRSP annuitant’s estate by virtue of being a beneficiary under a trust that is a beneficiary under the estate – a structure typically contemplated in the estate planning of parents of mentally infirm children.

This change applies after 1988.

Where Tax Payable

ITA
146(10.1)

Subsection 146(10.1) of the Act provides that income earned by a trust governed by a retirement savings plan from non-qualified investments is taxable under Part I. Subparagraph 146(10.1)(b)(ii) provides that income for this purpose includes the full amount of capital gains in excess of capital losses. This subparagraph is reworded for clarity, applicable on Royal Assent.

Clause 141

Home Buyers’ Plan

ITA
146.01

Section 146.01 of the Act set out the requirements for the Home Buyers’ Plan (HBP), which allows the tax-free withdrawal of RRSP funds for the purchase of a home.

Definitions

ITA
146.01(1)

"quarter"

Subsection 146.01(1) of the Act contains the definition "quarter" for purposes of the rules relating to the HBP. This definition is repealed as a consequence of the repeal of subsection 146.01(8) of the Act, where this definition applied. The repeal of this definition applies for the 2002 and subsequent taxation years.

Filing of Prescribed Form

ITA
146.01(8)

In order for an RRSP withdrawal to qualify as an HBP withdrawal, the taxpayer must make a written request in prescribed form to the RRSP issuer. The prescribed form for this purpose is the T1036. Under subsection 146.01(8) of the Act, an RRSP issuer to whom a T1036 is submitted must file the form with the Minister of National Revenue no later than 15 days after the quarter in which it was so submitted.

Subsection 146.01(8) is repealed. Rather than reporting HBP withdrawals on a quarterly basis by filing the relevant T1036, RRSP issuers are instead required (by subsection 214(1) of the Regulations) to report such withdrawals on an annual basis using the T4RSP.

The repeal of subsection 146.01(8) applies for the 2002 and subsequent taxation years.

Clause 142

Registered Education Savings Plans - Conditions for Registration

ITA
146.1(2)(g.3) and (2.3)

Subsection 146.1(2) of the Act sets out the conditions that must be satisfied in order for an education savings plan to be accepted for registration.

New paragraph 146.1(2)(g.3) is introduced to preclude non-residents and individuals who have not yet been assigned a Social Insurance Number (SIN) from becoming a beneficiary under a registered education savings plan (RESP) or from benefiting from RESP contributions.

Specifically, paragraph 146.1(2)(g.3) requires that an education savings plan not permit an individual to be designated as a beneficiary under the plan, and not allow a contribution for an individual who is a beneficiary under the plan, unless the individual's SIN has been provided to the promoter of the plan and the individual is resident in Canada.

If an individual is designated as a beneficiary under an RESP in conjunction with the transfer of property into the plan from another RESP under which the individual was a beneficiary immediately before the transfer, the requirement that the individual be resident in Canada in order to be designated as a beneficiary does not apply. However, subject to the exceptions in new subsection 146.1(2.3), the individual's SIN has to be provided to the promoter in order for the individual to be designated as a beneficiary under the transferee RESP. This special rule is intended primarily to accommodate transfers from an RESP to a replacement RESP after the beneficiary has ceased to be resident of Canada. (It should be noted that the transfer itself, as a contribution to an RESP, is not subject to the SIN and residency conditions that apply to ordinary contributions.)

New subsection 146.1(2.3) provides two additional exceptions to the SIN condition that are primarily of relevance to RESPs that were entered into before 1999 and RESPs that replace such plans. These exceptions recognize that the Canada Customs and Revenue Agency only began requiring the beneficiary's SIN to be provided on the application for registration for plans entered into after 1998.

The first new exception allows an education savings plan that was entered into before 1999 to not require that an individual's SIN be provided in respect of a contribution to the plan. Such contributions, however, continue to be ineligible for the Canada Education Savings Grant. It should be noted that this exception is only relevant for contributions made for existing beneficiaries under such plans. An individual without a SIN is prevented from being designated as a new beneficiary under such a plan.

Under the second new exception, an education savings plan may permit a non-resident individual who does not have a SIN to be designated as a beneficiary under the plan provided that the designation is being made in conjunction with a transfer of property into the plan from another RESP under which the individual was a beneficiary immediately before the transfer. This exception is intended, in particular, to accommodate the transfer of property from an RESP that was entered into before 1999, under which the beneficiary had always been non-resident or had ceased to be resident in Canada before having been assigned a SIN, to a replacement RESP (and successive transfers).

Paragraph 146.1(2)(g.3) and subsection 146.1(2.3) apply after 2003.

Clause 143

Registered Retirement Income Funds

ITA
146.3

Section 146.3 of the Act provides rules relating to registered retirement income funds (RRIFs).

Definitions

ITA
146.3(1)

"annuitant"

Subsection 146.3(1) of the Act contains the definition "annuitant" for purposes of the rules relating to RRIFs. Paragraph (b) of the definition allows the spouse or common-law partner of a deceased annuitant to become the successor annuitant under the RRIF, if the deceased annuitant so elected or the legal representative of the deceased annuitant consents. When this paragraph was amended by S.C. 2000, c. 12 (the Modernization of Benefits and Obligations Act, formerly Bill C-23), the word "or" in the English version was inadvertently removed. The definition is amended to correct this error, and to improve the readability of this paragraph, with the same application as the initial amendment in Bill C-23.

Acceptance of Fund for Registration

ITA
146.3(2)

Subsection 146.3(2) of the Act outlines the conditions that must be satisfied in order for a retirement income fund to be registered as a RRIF.

Paragraph 146.3(2)(c) of the English version refers to a carrier who "is a person referred to as a depository in section 146". This paragraph is amended to replace the word "depository" with the word "depositary", which is the term used in section 146. This amendment applies after 2001.

Paragraph 146.3(2)(f) prohibits a RRIF from receiving property, other than property transferred from sources listed in that paragraph. The paragraph is amended so that a RRIF may receive property transferred directly from a deferred profit sharing plan (DPSP) in accordance with subsection 147(19) of the Act. This amendment is consequential on an amendment to subsection 147(19) that permits direct transfers from DPSPs to RRIFs. For more details, see the commentary to that subsection. This amendment applies after March 20, 2003.

Amount Included in Income

ITA
146.3(5.1)

In 2000, the Act was amended to include common-law partners, but some provisions, including the English version of subsection 146.3(5.1), were overlooked. This subsection is therefore amended to correct this omission. The amendment applies, in general, to the 2001 and subsequent taxation years. However, it may apply as of 1998 if the common-law partners jointly choose to be deemed as such, beginning in that year, for the purposes of the application of the Act.

Tax Payable on Income from Non-qualified Investment

ITA
146.3(9)

Subsection 146.3(9) of the Act provides that, if a trust governed by a RRIF acquires a non-qualified investment, any income earned by the trust from the investment is taxable under Part I.

Subsection 146.3(9) is amended to clarify that income from property that was a qualified investment at the time it was acquired but later became non-qualified is also taxable in respect of the non-qualified period. This amendment, which applies to the 2003 and subsequent taxation years, is consistent with the tax treatment of income earned by RRSP trusts from non-qualified investments under subsection 146(10.1) of the Act.

Subparagraph 146.3(9)(b)(ii) is reworded for clarity, applicable on Royal Assent.

Clause 144

Deferred Profit Sharing Plans

ITA
147

Section 147 of the Act provides rules relating to DPSPs.

Acceptance of Plan for Registration

ITA
147(2)(e)

Subsection 147(2) of the Act sets out the conditions that a profit sharing plan must satisfy in order to be registered as a DPSP. Paragraph 147(2)(e) requires that such a plan include a provision stipulating that no right of an employee who is a beneficiary under the plan is capable of surrender or assignment.

Paragraph 147(2)(e) is amended in two ways. First, it is amended to extend the application of the provision to require that the stipulation apply to all persons who have rights under a DPSP, not just employee beneficiaries. Second, it is amended to provide that the stipulation is not required to prohibit:

These new provisions are similar to the rule in Regulation 8502(f) that applies to registered pension plans (RPPs). The new provisions are, in part, consequential on amendments to subsection 147(19) of the Act that accommodate the division of DPSP assets on the breakdown of a marriage or common-law partnership.

These amendments apply after March 20, 2003.

Compensation

ITA
147(5.11)

Subsection 147(5.1) of the Act sets out the employer contribution limits for DPSPs. In general terms, the maximum employer contributions in respect of an individual for a calendar year cannot exceed the lesser of: (i) 18% of the individual’s compensation for the year from the employer; and (ii) 1/2 of the year’s money purchase limit. For this purpose, "compensation" and "money purchase limit" are generally as defined in subsection 147.1(1). Additional cross-plan limits apply if the individual also participates in an RPP sponsored by the employer or in a DPSP or RPP sponsored by a non-arm’s length employer.

If the contribution limits are not respected for a calendar year, the Minister of National Revenue may revoke the registration of the DPSP. In addition, the employer is denied a deduction for all contributions made in the year, except as expressly permitted in writing by the Minister.

Subsection 147(5.11) provides a special relieving rule that applies when an employee who is a beneficiary under a DPSP terminates employment with a participating employer in a calendar year. In this circumstance, for the purposes of determining whether the contribution limits have been satisfied, the employee’s compensation can be based on the compensation for the immediately preceding year, if it is more than the compensation for the year of termination.

This rule recognizes that it is common practice for an employer to make contributions to a DPSP only after its fiscal year-end, since this is when profits are determined. This can often result in employer contributions being made based (in whole or in part) on employees’ earnings in the previous calendar year, but being included in the employees’ contribution limits for the current calendar year. This in turn can give rise to over-contributions when an employee terminates employment later in the year before having earned sufficient compensation to support the contribution. However, subsection 147(5.11) generally ensures that such over-contributions do not result in adverse tax effects by allowing the contribution limits to be based on the employee’s compensation from the preceding calendar year.

There are, however, two policy concerns with the approach used in subsection 147(5.11). The first concern is that the provision deals only with over-contributions that involve employees who terminate employment. It does not provide relief for similar over-contributions that arise where an employee takes an unpaid leave of absence before having earned sufficient compensation to support any contributions that the employer had already made on his or her behalf. The second concern is that the provision allows DPSP contributions to be made in situations where there is no supporting employment income.

To address these concerns, subsection 147(5.11) is repealed and replaced by a broader relief mechanism in section 8301 of the Regulations. The new mechanism will provide relief in both of the situations described above by allowing over-contributions to be ignored for purposes of the DPSP contribution limits, provided the excess is refunded from the plan.

The repeal of subsection 147(5.11) applies to cessations of employment that occur in 2003 and subsequent calendar years, while the new refund mechanism in the Regulations applies for 2002 and subsequent calendar years. As a result, for excess contributions relating to cessations of employment that occur in 2002, employers will be entitled to relief either by relying on existing 147(5.11) or by using the new refund mechanism.

Transfer to RPP, RRSP, RRIF or DPSP

ITA
147(19)

Subsection 147(19) of the Act provides for the tax-free transfer on behalf of an individual of a lump sum amount from a DPSP to an RPP, an RRSP or another DPSP for the individual's benefit. Currently, direct transfers may be made on behalf of an individual only if the individual is an employee or former employee of an employer who participated in the plan or was a spouse or common-law partner of a deceased employee as at the date of the employee’s death.

A number of technical amendments are being made to subsection 147(19) to provide greater consistency with the transfer provisions that apply to RPPs.

Subsection 147(19) is amended so that the direct transfer on the death of an employee may be made on behalf of a former spouse or common-law partner of the deceased employee. It is also amended to allow for direct transfers of DPSP assets to be made on behalf of a spouse or common-law partner, or former spouse or common-law partner, of an employee or former employee, where the transfer relates to a division of property arising on the breakdown of their marriage or common-law partnership.

Finally, subsection 147(19) is amended to allow for direct transfers from DPSPs to RRIFs. This is primarily of relevance where the surviving spouse or common-law partner of a deceased employee is over 69 years of age and, therefore, cannot transfer the DPSP assets to an RRSP. In this regard, the French version of paragraph 147(19)(d) is amended in order to add a reference to the word "fonds".

These amendments apply to amounts transferred after March 20, 2003.

Clause 145

Amounts Included in Computing Policyholder’s Income

ITA
148(1)(e)

Subsection 148(1) of the Act requires the inclusion in income of certain amounts from the disposition of a life insurance policy, but excludes from this rule annuities described in paragraph 148(1)(e).

Paragraph 148(1)(e) describes

An annuity described in paragraph 148(1)(e) is defined, by paragraph 304(1)(b) of the Income Tax Regulations, to be a "prescribed annuity contract" and, as such, is not subject to the accrual rules set out in section 12.2 of the Act. This treatment reflects the fact that the policyholder acquiring such an annuity does so with tax-deferred funds, and is generally meant to be taxed only when amounts are paid out of the annuity.

Subsection 148(1) is amended to include, in the annuities described in paragraph (e), an annuity that is a "qualifying trust annuity" with respect to a taxpayer (as defined in new subsection 60.011(2)), the payment for which was deductible by the taxpayer under paragraph 60(l). This reflects the fact that a qualifying trust annuity will typically be held by a trust, rather than by the taxpayer who is entitled to the deduction under paragraph 60(l), and ensures that it is treated, for tax purposes, in the same manner as if it were held by the taxpayer.

This amendment applies after 1988.

Clause 146

Eligible Funeral Arrangements

ITA
148.1

Section 148.1 of the Act provides for the tax-free build-up of income earned on contributions made under an eligible funeral arrangement (EFA), which is an arrangement that provides for the pre-funding of expenses with respect to funeral and cemetery services.

Contributions made to an EFA are not deductible, and income earned in an EFA accrues tax-free. Distributions from an EFA as payment for the provision of funeral or cemetery services are not taxable. Other distributions from an EFA are generally treated first as a distribution of earnings, which is taxable, then as a return of contributions, which is not taxable.

Definitions

ITA
148.1(1)

"relevant contribution"

A "relevant contribution" to a particular arrangement is the amount of any contribution that is not made by way of a transfer from another eligible funeral arrangement or the amount of any other contribution made directly to another eligible funeral arrangement that can reasonably be considered to have been transferred into the particular arrangement.

Paragraph (b) of the French version of the definition "relevant contribution" refers to « l'arrangement visé à l'alinéa a) » (the arrangement referred to in paragraph (a)). This is a source of confusion as paragraph (a) refers to two arrangements: the particular arrangement and an eligible federal arrangement. For clarification purposes, the French version of the definition is reformulated in order to introduce the notion of « arrangement donné » (a particular arrangement), making it clear which arrangement is referred to in paragraph (b).

This amendment applies on Royal Assent.

Transfer of Funds

General Discussion

ITA
148.1(3) to (5)

Section 148.1 is amended to provide specific rules relating to transfers from one EFA account to another. In general terms, the changes are as follows:

These changes are described in more detail below.

Income Inclusion on Return of Funds

ITA
148.1(3)

Subsection 148.1(3) of the Act provides for an income inclusion by a taxpayer in the event that there is a distribution of funds from an individual’s EFA account to the taxpayer (otherwise than as a payment for the provision of funeral or cemetery services with respect to the individual). The amount of the income inclusion is the lesser of the distributed amount and a second amount. In general terms, this second amount is determined by the formula:

A + B – C

where

A is the balance in the EFA account immediately before the distribution,

B is the total of all payments made from the EFA account before the distribution for the provision of funeral or cemetery services, and

C is the total of all "relevant contributions" in respect of the EFA account that were made before the distribution.

For the purpose of the description of C, an amount is defined in subsection 148.1(1) to be a "relevant contribution" in respect of a particular EFA account if

The effect of subsection 148.1(3) is to include in the income of the taxpayer the lesser of the amount received and an amount which generally represents the income accumulated in the EFA account. If the amount received by the taxpayer is greater than the amount included in the taxpayer’s income, the excess generally represents a non-taxable refund of relevant contributions (represented by the variable C in the formula).

The description of C is amended so that its value is reduced, in effect, by any relevant contributions previously transferred from the EFA account to another EFA account. This ensures that the amount of the transferred relevant contribution (which, by virtue of subsection 148.1(3), can be distributed from the recipient EFA account tax-free) cannot also be used to support a subsequent tax-free withdrawal from the transferor EFA account.

The description of C is amended to provide that its value is determined by the formula

D – E

For this purpose, the value of D is the amount determined under the existing description of C. The value of E is the total of all amounts each of which is

minus

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

Deemed Distribution on Transfer

ITA
148.1(4)

New subsection 148.1(4) of the Act contains rules that apply when an amount is transferred from one EFA account to another EFA account of the same or another person.

Paragraph 148.1(4)(a) deems the transfer to be a distribution from the transferor EFA account. If the individual from whose account the amount is transferred is alive at the time of the transfer, that individual is deemed to be the recipient of the distribution. Otherwise, the recipient is deemed to be the individual to whose EFA account the amount is transferred. This deeming provision ensures that subsection 148.1(3) applies to the transfer. Consequently, the transferred amount will be included in computing the income of the deemed recipient, except to the extent that the transferred amount exceeds the income accumulated in the transferor EFA account.

Paragraph 148.1(4)(b) of the Act deems the amount transferred to be a contribution made (otherwise than by way of transfer) under the recipient EFA account. This ensures that the income portion of the transferred amount (which is included in income, under subsection 148.1(3), as a distribution from the transferor account) is considered to be a "relevant contribution" in respect of the recipient EFA account (which it would not otherwise be, because of the definition "relevant contribution" in subsection 148.1(1)). This allows it to subsequently be withdrawn from the recipient EFA account on a tax-free basis.

New subsection 148.1(4) applies to transfers made after December 20, 2002.

Non-application of Subsection (4)

ITA
148.1(5)

New subsection 148.1(5) of the Act provides that new subsection 148.1(4) does not apply when the entire balance of an individual’s EFA account is transferred to another EFA account of the same individual and the transferor EFA account is terminated immediately after the transfer. Consequently, there will be no deemed distribution resulting from such a transfer.

New subsection 148.1(5) applies to transfers made after December 20, 2002.

The following examples illustrate the application of the amendments to subsection 148.1.

Example 1

Paul sets up an EFA account for the pre-funding of his funeral expenses. He contributes $10,000 to his account, and earns $7,000 of interest in the account. Paul transfers $3,000 to an EFA account which he establishes for his daughter, Gaby.

The transferred amount is deemed to be a distribution to Paul under new paragraph 148.1(4)(a). Consequently, Paul includes in his income, under subsection 148.1(3), an amount of $3,000, which is the lesser of

A + B – C (where C = D – E)
= $17,000 + $0 – ($10,000 - $0)

The transfer is treated, in effect, as a distribution of a portion of the income accumulated in the plan.

Under new paragraph 148.1(4)(b), the transferred amount is also deemed to be a contribution made, other than by way of transfer, to Gaby’s EFA account. Thus, the $3,000 is considered to be a relevant contribution in respect of Gaby’s EFA account, and can subsequently be withdrawn tax-free.

Example 2

The facts are the same as in Example 1, except that Paul transfers $13,000 to Gaby’s EFA.

The transferred amount is deemed to be a distribution to Paul under new paragraph 148.1(4)(a). Consequently, Paul includes in his income, under subsection 148.1(3), an amount of $7,000, which is the lesser of

A + B – C ( where C = D – E)
= $17,000 + $0 – ($10,000 – $0)

The transfer is treated, in effect, as a distribution of all of the income accumulated in the plan ($7,000), which is taxable, plus a return of a portion of the relevant contributions in respect of the EFA ($6,000), which is not taxable.

Under new paragraph 148.1(4)(b), the transferred amount is also deemed to be a contribution made, other than by way of transfer, to Gaby’s EFA account. This has no particular significance with respect to the portion of the transfer that represents relevant contributions in respect of Paul’s EFA account, since this amount would be considered to be a relevant contribution to Gaby’s EFA account under the existing rules. However, it does have significance with respect to the portion of the transfer that represents income in Paul’s EFA account, in that it allows that portion to become a relevant contribution in respect of Gaby’s EFA account which can then be withdrawn from Gaby’s account tax-free.

Example 3

The facts are the same as in Example 2. After the transfer of $13,000, the balance in Paul’s EFA account is $4,000, all of which represents relevant contributions in respect of the account. Over the next few years, the account earns an additional $2,500 of interest. Paul then withdraws the entire balance from the account.

The withdrawal is a distribution under subsection 148.1(3). Consequently, Paul includes $2,500 in his income, which is the lesser of:

A + B – C (where C = D – E)
= $6,500 + 0 - ($10,000 - $6,000)

The value of E ($6,000) is the excess of the amount that was previously transferred and to which subsection 148.1(4) applied ($13,000) over the portion of that amount that was included in income under subsection 148.1(3) ($7,000).

Clause 147

Exemptions

ITA
149

Section 149 of the Act provides that no tax is payable under Part I on certain persons’ taxable income for a period in a taxation year during which the person is a person listed in that section.

Exemptions - Municipalities and Other Governmental Public Bodies

ITA
149(1)(d.5)

Paragraph 149(1)(d.5) of the Act exempts from tax, subject to an income test, the taxable income of any corporation, commission or association at least 90% of the capital of which is owned by one or more municipalities in Canada.

In accordance with the Tax Court of Canada decision in Otineka Development Corporation Limited and 72902 Manitoba Limited v. The Queen, 94 D.T.C. 1234, [1994] 1 C.T.C. 2424, an entity could be considered a municipality for the purpose of this paragraph on the basis of the functions it exercised. More recently, however, the decision in Tawich Development Corporation v. Deputy Minister of Revenue of Quebec, [1997] 2 C.N.L.R. 187 (Que. Civil Chamber), aff'd 2001 D.T.C. 5144 (Que. C.A.), a decision under the Taxation Act (Quebec), held that an entity could not attain the status of a municipality by exercising municipal functions but only by statute, letters patent or order. From a tax policy perspective, it is desired that the entities previously entitled to the exemption on the basis of the Otineka decision continue to have access to the exemption. This amendment resolves the uncertainty resulting from the two conflicting cases. The exemption in paragraph 149(1)(d.5) is therefore extended to include any corporation, commission or association at least 90% of the capital of which was owned by one or more entities each of which is a municipal or public body performing a function of government in Canada, which is consistent with the bodies described in paragraph 149(1)(c) of the Act.

This amendment applies to taxation years that begin after May 8, 2000.

Exemptions - Subsidiaries of Municipal Corporations

ITA
149(1)(d.6)

Paragraph 149(1)(d.6) of the Act exempts from tax, subject to an income test, a wholly-owned subsidiary of a corporation, commission or association referred to in paragraph 149(1)(d.5) of the Act. As a consequence of the amendment to paragraph 149(1)(d.5), the geographical boundaries of the entities referred to in subparagraphs (i) and (ii) of paragraph 149(1)(d.6) are expanded to include references to all of the entities in the amended 149(1)(d.5).

This amendment applies to taxation years that begin after May 8, 2000.

Trusts established because of the Environment Quality Act (Quebec) or the Nuclear Fuel Waste Act

ITA
149(1)(z.1) and (z.2)

New paragraph 149(1)(z.1)) exempts from tax under Part I a trust created because of a requirement imposed by section 56 of the Environment Quality Act (Quebec) (EQA). That provision requires certain residual materials elimination facilities to provide financial guarantees by way of establishment of a social trust to cover certain costs after the closure of the facility. This exemption applies only where no persons are beneficially interested in the trust other than Her Majesty in right of Canada, Her Majesty in right of a province and municipalities that are exempt from taxation under subsection 149(1) of the ITA.

Similarly, new paragraph 149(1)(z.2) exempts from tax under Part I a trust created because of a requirement imposed by subsection 9(1) of the Nuclear Fuel Waste Act (NFWA). That provision requires specified entities to contribute moneys to a trust fund for the management of nuclear fuel waste. In this case, the exemption only applies where no persons are beneficially interested in the trust other than Her Majesty in right of Canada, Her Majesty in right of a province or a Crown-owned nuclear energy corporation that is exempt from taxation under subsection 149(1) of the ITA.

These provisions ensure that the tax consequences to a municipality or Crown-owned nuclear energy corporation that is required by federal or provincial legislation to set up a trust to fund an environmental obligation are the same as if the municipality or the Crown-owned nuclear energy corporation accumulated the funds internally rather than in a trust.

These amendments apply to the 1997 and subsequent taxation years.

Income Test

ITA
149(1.2)

Subsection 149(1.2) of the Act excludes, for the purposes of paragraphs 149(1)(d.5) and (d.6) of the Act, certain income from the determination of where an entity to which either of those paragraphs applies derives its income. As a consequence of the amendment to paragraph 149(1)(d.5), a written agreement in subsection 149(1.2) is expanded to include reference to a municipal or public body.

In addition, subparagraph 149(1.2)(a)(vi) is added to clarify that the geographical boundary of a municipal or public body performing a function of government in Canada is defined to be the area described in new subsection (11).

This amendment applies to taxation years that begin after May 8, 2000.

Votes or de Facto Control

ITA
149(1.3)

Subsection 149(1.3) of the Act provides that, for the purposes of applying paragraph 149(1)(d.5) and subsection 149(1.2) of the Act to a corporation, 90% of the capital of the corporation is considered to be owned by one or more municipalities only if the municipalities are entitled to at least 90% of the votes associated with the shares of the corporation.

As a consequence of the amendment to paragraph 149(1)(d.5), subsection 149(1.3) is amended applicable to taxation years that begin after May 8, 2000, to include reference to municipal or public bodies performing a function of government in Canada.

In addition, subsection 149(1.3) is replaced, applicable to taxation years that begin after December 20, 2002, to provide that paragraphs 149(1)(d) to (d.6) do not apply to exempt a person's taxable income for a period in a taxation year in two cases.

First, under new paragraph 149(1.3)(a), a corporation is not exempt from tax on its taxable income for a period in a taxation year if at any time during the period the corporation has issued shares that are owned by one or more persons (other than certain tax-exempts) that, in total, give them more than 10% of the votes that could be cast at a meeting of shareholders. For this purpose, it is necessary to determine whether more than 10% of the votes could be cast at a meeting of the shareholders by a person or persons other than:

Second, under new paragraph 149(1.3)(b), a person is not exempt because of any of paragraphs 149(1)(d) to (d.6) from tax on taxable income for a period in a taxation year if at any time in the period the person is, or would be if the person were a corporation, controlled, directly or indirectly in any manner whatever, by a person (or by a group of persons that includes a person) other than:

For further details about the expression "controlled, directly or indirectly in any manner whatever", reference should be made to subsections 256(5.1) and (6) of the Act. In general, the expression refers to a controller, who has any direct or indirect influence that, if exercised, would result in control in fact of the person.

Geographical Boundaries - Body Performing Government Functions

ITA
149(11)

Subsection 149(11) of the Act is added to define, for the purposes of section 149, the geographical boundaries of a municipal or public body performing a function of government in Canada. Those boundaries are defined as encompassing the area in respect of which an Act of Parliament or an agreement given effect by an Act of Parliament recognizes or grants to the body a power to impose taxes; or if there has been no such recognition or grant, the area within which the body has been authorized by the laws of Canada or of a province to exercise that function.

For example, if a particular self-governing First Nation meets the definition of "a public body performing a function of government in Canada," it is intended that the relevant geographic boundary would delineate the area where the self-government agreement, or the statute enacting self-government powers, provides the First Nation authority to impose direct taxes. As a second example, if a particular Indian Band meets the definition of "a public body performing a function of government in Canada," it is intended that the geographic boundary of the Indian Band be the band's reserves as defined in the Indian Act. Similarly, if a particular school board meets the definition of "a municipal or public body performing a function of government in Canada" it is intended that the geographic boundary of the school board be the area of jurisdiction of the board as defined by provincial legislation or regulation.

This amendment applies to taxation years that begin after May 8, 2000.

Clause 148

Charities

ITA
149.1

Section 149.1 of the Act provides the rules that must be met for charities to obtain and keep registered status. A registered charity is exempt from tax on its taxable income and can issue receipts which entitle its donors to claim tax relief for their donations.

Definitions

ITA
149.1(1)

Subsection 149.1(1) of the Act contains definitions that are relevant for the purposes of section 149.1.

"charitable organization"

The definition "charitable organization" provides that more than 50% of the directors, trustees, officers or similar officials of a charitable organization must deal with each other and with each of the other directors, trustees, officers or similar officials at arm’s length.

For a charity that has applied for registration after February 15, 1984 and which has been designated as a private or public foundation, the definition "charitable organization" also requires that not more than 50% of the charity’s capital be contributed by a person or group of persons not dealing with each other at arm’s length. This definition is amended to replace the "contribution" test with a "control" test. As a result, a charity will not be disqualified from being treated as a charitable organization solely because a person, or a group of persons not dealing with each other at arm’s length, has contributed more than 50% of the charity’s capital. However, such a person or group is not permitted to control the charity in any way, nor may the person or the members of the group represent more than 50% of the directors, trustees, officers and similar officials of the charity.

This amendment generally applies after 1999.

"disbursement quota"

The "disbursement quota" for a taxation year of a charitable foundation or organization is defined in subsection 149.1(1) of the Act for the purpose of determining the amount that the charity is required to spend on charitable activities or gifts to other charities. One factor in calculating the disbursement quota is a specified proportion of donations for which tax receipts are issued.

The definition "disbursement quota" is amended consequential to the addition of new subsection 248(31) of the Act, in respect of gifts made after December 20, 2002, to provide that the amount of a gift for which a tax receipt is issued refers to the "eligible amount" of the gift. For additional information, see the commentary to new subsection 248(31).

"enduring property"

The English version of the definition "enduring property", which applies for the purpose of the definition "disbursement quota" to taxation years that begin after March 22, 2004, is amended to correct a cross-reference in its paragraph (d).

"public foundation"

The definition "public foundation" provides that more than 50% of the directors, trustees, officers or similar officials of a public foundation must deal with each other and with each of the other directors, trustees, officers or similar officials at arm’s length.

This definition requires that not more than 50% (75% in some cases) of the foundation’s capital can be contributed by a person or group of persons not dealing with each together at arm’s length. The "contribution" test in the definition is replaced by a "control" test. As a result, a foundation will not be disqualified from being treated as a public foundation solely because a person, or a group of persons not dealing with each other at arm’s length, has contributed more than 50% of the foundation’s capital. However, such a person or group is not permitted to control the foundation in any way, nor may the person or the members of the group represent more than 50% of the directors, trustees, officers and similar officials of the foundation.

This amendment generally applies after 1999.

Revocation of Registration

ITA
149.1(2), (3) and (4)

Subsections 149.1(2), (3) and (4) of the Act set out the reasons for which the Minister of National Revenue may revoke the registration of a charitable organization, a public foundation and a private foundation, respectively. These subsections are amended to permit the revocation of the registration of such entities if they make gifts (other than gifts made in the course of their charitable activities) to persons or entities that are not qualified donees. A "qualified donee" is essentially a person or entity to which a tax deductible or tax creditable donation may be made.

These amendments apply to gifts made after December 20, 2002.

Accumulation of Property

ITA
149.1(9)

Subsection 149.1(8) of the Act permits a registered charity, with the approval of the Minister of National Revenue, to accumulate property over a specified period for a particular purpose. The amount of such property accumulated is deemed to have been expended in the taxation year of the charity in which it was accumulated. If in fact the charity defaults on this responsibility by not using the property for the approved purpose within the specified period, subsection 149.1(9) treats that property as income of the charity and the amount of a gift for which it issued a receipt. This affects the calculation of the disbursement quota of the charity, with the result that the amount of the property must be actually disbursed in the year following default.

Subsection 149.1(9) is amended consequential to the addition of new subsection 248(31) of the Act, in respect of gifts made after December 20, 2002, to provide that the amount of a gift for which a tax receipt is issued refers to the "eligible amount" of a gift. For additional information, see the commentary to new subsection 248(31).

Information May be Communicated

ITA
149.1(15)(b)

Section 241 of the Act prohibits the use or communication by an official of information obtained under the Act unless specifically authorized by one of the exceptions found in that section. Paragraph 149.1(15)(b) of the Act, which deals with charities, provides that, notwithstanding section 241, the Minister of National Revenue may publish a listing of all registered or previously registered charities indicating the name, location, registration number and, where the charity is no longer registered, the effective date of the revocation, annulment or termination of the charity’s registration. This provision does not currently allow for the release of similar information in respect of registered Canadian amateur athletic associations. Since taxpayers who make donations to such associations obtain the same tax relief that is available in respect of donations to registered charities and, since subsection 149.1(15) is intended to provide transparency for the benefit of potential donors, paragraph 149.1(15)(b) is amended, effective after Royal Assent to this measure, to allow for the release of such information in respect of Canadian amateur athletic associations.

Clause 149

Assessment

ITA
152

Section 152 of the Act contains rules relating to assessments and reassessments of tax, interest and penalties payable by a taxpayer and to determinations and redeterminations of amounts of tax deemed to have been paid by a taxpayer.

Provisions Applicable

ITA
152(1.2)

Subsection 152(1.2) is amended to delete the reference to section 126.1 of the Act, consequential to the repeal of that section. For additional information, see the commentary to section 126.1.

This change applies in respect of forms filed after March 20, 2003.

Determination of UI Premium Tax Credit

ITA
152(3.4)

This subsection enables a taxpayer to request the Minister of National Revenue to determine the amount deemed by subsection 126.1(6) or (7) of the Act to be an overpayment on account of the taxpayer’s liability under Part I of the Act.

This subsection is repealed consequential to the repeal of section 126.1. For additional information, see the commentary to section 126.1.

This change applies in respect of forms filed after March 20, 2003.

Notice of Determination

ITA
152(3.5)

Subsection 152(3.5) of the Act requires the Minister of National Revenue to respond to a request for a determination of the UI premium tax credit. This subsection is repealed consequential to the repeal of section 126.1. For additional information, see the commentary to section 126.1.

This change applies in respect of forms filed after March 20, 2003.

Clause 150

Instalments

ITA
157(3)

Section 157 of the Act requires a corporation to pay monthly instalments of its total tax payable under Parts I, I.3, VI, VI.1 and XIII.1 of the Act. Subsection 157(3) allows corporations to reduce each monthly instalment by 1/12 of the amount of certain tax refunds, including the "dividend refund" under section 129 of the Act. For most mutual fund corporations, the dividend refund amount is computed according to rules set out in subsection 131(5) of the Act. Paragraph 157(3)(c), which allows a mutual fund corporation to apply its dividend refund to reduce its instalments, therefore refers to subsection 131(5). However, prescribed labour-sponsored venture capital corporations (LSVCCs), which are by definition mutual fund corporations, do not use subsection 131(5) to compute their dividend refunds – instead, they use special rules in subsection 131(11) of the Act. To ensure that subsection 157(3) applies appropriately to LSVCCs, this amendment adds to paragraph 157(3)(c) a reference to subsection 131(11). The amendment applies for the 1999 and subsequent taxation years.

Clause 151

Person Acting for Another – Personal Liability

ITA
159(3)

Subsection 159(1) of the Act provides, in part, that a legal representative acting for another person is jointly and severally liable for each amount payable by the other person under the Act, to the extent that the representative has possession and control of the other person’s assets. If the representative distributes assets of the other person before obtaining a certificate from the Minister of National Revenue that the other person’s tax debts have been paid, the Minister may, under subsection 159(3) of the Act, assess the representative for the amount of the debt.

Subsection 159(3) is amended to clarify that a legal representative so assessed after December 20, 2002 is subject to interest on the assessment without any limit on the amount of interest for which the representative may be liable.

Clause 152

Tax Liability – Non-arm's Length Transfers of Property

ITA
160

Section 160 of the Act contains rules regarding the joint and several liability of a taxpayer for the income tax liability of another person (the "tax debtor") who, when not dealing at arm’s length with the taxpayer, transferred property to the taxpayer for consideration less than its fair market value.

ITA
160(1)(e)

The amount that a taxpayer is liable to pay in respect of the transfer of property from a non-arm’s length tax debtor is determined under subsection 160(1) of the Act. The Minister may assess the taxpayer for such a liability under subsection 160(2) of the Act. Paragraph 160(1)(e) is amended, in respect of assessments made after December 20, 2002, to clarify that the assessment of the taxpayer is subject to interest, without any limit on the amount of interest for which the taxpayer may be liable.

Joint Liability Where subsection 69(11) Applies

ITA
160(1.1)

Subsection 160(1.1) of the Act provides that where subsection 69(11) of the Act applies to deem a disposition of property to have occurred at fair market value, both the person disposing of the property and the person acquiring the property are jointly and severally liable for the payment of each other's liabilities arising under the Act as a result of that disposition.The Minister of National Revenue may assess the person for such a liability under subsection 160(2) of the Act. Subsection 160(1.1) is amended, in respect of assessments made after December 20, 2002, to clarify that the assessment of the taxpayer is subject to interest.

Joint Liability – Tax on Split Income

ITA
160(1.2)

Subsection 160(1.2) of the Act, which applies in respect of tax owing on split income, is amended in two respects.

First, paragraphs 160(1.2)(a), (b) and (d) are amended to replace the phrase "goods or services" with the phrase "property or services" as a consequence of the same changes made to paragraphs (b) and (c) of the definition "split income" in subsection 120.4(1). These amendments apply after December 20, 2002.

Second, a "postamble" is added to subsection 160(1.2) to clarify that, in respect of assessments made under subsection 160(2) after December 20, 2002, the assessment is subject to interest.

Assessment

ITA
160(2)

Subsection 160(2) of the Act allows the Minister of National Revenue to assess a taxpayer at any time in respect of liabilities arising under section 160, with such assessment having the same effect as if it had been made under section 152 of the Act. Subsection 160(2) is amended, in respect of assessments made after December 20, 2002, to clarify that the assessment is subject to interest.

Clause 153

Where Excess Refunded

ITA
160.1(3)

Subsection 160.1(3) of the Act allows the Minister of National Revenue to assess a taxpayer in respect of excess refunds and overpayments for which the taxpayer is jointly and severally liable under subsection 160.1(1), (1.1), (2.1) or (2.2) of the Act. Subsection 160.1(3) is amended, in respect of such assessments made after December 20, 2002, to clarify that such an assessment is subject to interest, except that no interest is payable to the extent that the excess refund is attributable to the overpayment of a GST tax credit or a child tax benefit.

Clause 154

Joint and Several Liability – Amounts Received out of or under RRSP

ITA
160.2(1), (2) and (3)

Subsection 160.2(1) of the Act provides that a taxpayer who receives benefits out of another person’s registered retirement savings plan is jointly and severally liable for the portion of that other person’s tax that is attributable to those benefits. Subsection 160.2(2) of the Act provides a similar result with respect to benefits received out of another person’s registered retirement income fund. The Minister may assess the taxpayer for such a liability under subsection 160.2(3) of the Act.

Subsections 160.2(1), (2) and (3) are amended, in respect of assessments made after December 20, 2002, to clarify that the assessment is subject to interest, without any limit on the amount of interest for which the taxpayer may be liable.

Joint and Several Liability in Respect of a Qualifying Trust Annuity

ITA
160.2(2.1)

New subsection 160.2(2.1) applies to annuities that are "qualifying trust annuities" with respect to a taxpayer (as defined in new subsection 60.011(2)).

A distinguishing feature of a qualifying trust annuity with respect to a taxpayer is that the annuitant thereunder is a trust under which the taxpayer is a beneficiary. Such an annuity will typically be acquired and held either by the trust that is the annuitant under the annuity, or by the estate of a deceased spouse, common-law partner, parent or grandparent of the taxpayer which acquired the annuity with proceeds received from a registered retirement savings plan or registered retirement income fund of the deceased individual or from a registered pension plan in which the deceased individual participated.

Where the cost of a qualifying trust annuity with respect to a taxpayer is deductible by the taxpayer under paragraph 60(l) and the taxpayer has not died before 2006, new section 75.2 deems amounts payable out of or under the annuity after 2005 and before the taxpayer’s death to have been received by the taxpayer. Section 75.2 also deems the taxpayer to have received, immediately before death, an amount out of or under the annuity equal to the fair market value of the annuity. By virtue of paragraph 56(1)(d.2), the taxpayer is required to include these amounts in computing income under Part I.

New subsection 160.2(2.1) provides that, where a taxpayer is deemed by section 75.2 to have received an amount from a qualifying trust annuity, the annuitant and the policyholder (which may be one and the same) are jointly and severally, or solidarily, liable for the portion of the taxpayer’s tax that is attributable to the amounts that the taxpayer is deemed to have received from the annuity. The Minister of National Revenue may reassess the annuitant and the policyholder for such a liability under subsection 160.2(3) of the Act.

Subsection 160.2(2.1) applies to assessments made after 2005.

No Limitation on Liability

ITA
160.2(2.2)

New subsection 160.2(2.2) of the Act provides that the provisions of new subsection 160.2(2.1), which make the annuitant and policyholder of a "qualifying trust annuity" with respect to a taxpayer (as defined in new subsection 60.011(2)) jointly and severally, or solidarily, liable for a portion of the taxpayer’s tax, do not limit the liability of the taxpayer under any provision of the Act. It also provides that there is no limitation on the liability of the annuitant or policyholder for the interest for which the annuitant or policyholder is liable under the Act on an assessment in respect of an amount that the annuitant or policyholder is liable to pay because of subsection 160.2(2.1).

Subsection 160.2(2.2) applies to assessments made after 2005.

Rules Applicable – Qualifying Trust Annuity

ITA
160.2(5)

New subsection 160.2(5) of the Act provides that a payment by the annuitant or policyholder of a "qualifying trust annuity" with respect to a taxpayer (as defined in new subsection 60.011(2)), on account of the annuitant’s or policyholder’s joint liability for a portion of the taxpayer’s tax, directly reduces the joint liability to the extent of the payment. However, a payment by the taxpayer on account of the taxpayer’s tax liability reduces the joint liability of the annuitant and the policyholder only to the extent that the payment reduces the total liability of the taxpayer to an amount that is less than the amount in respect of which the annuitant and policyholder were made jointly liable under subsection 160.2(2.1).

Subsection 160.2(5) applies to assessments made after 2005.

Clause 155

Liability – Amounts Received out of or under RCA Trust

ITA
160.3(1) and (2)

Subsection 160.3(1) of the Act provides that a person who receives benefits from a retirement compensation arrangement that relate to another taxpayer’s employment is jointly and severally liable for the portion of that other taxpayer's tax that is attributable to such benefits. The Minister of National Revenue may assess the person for such a liability under subsection 160.3(2) of the Act. Subsections 160.3(1) and (2) are amended, in respect of assessments made after December 20, 2002, to clarify that such an assessment is subject to interest, without any limit on the amount of interest for which the person may be liable.

Clause 156

Liability – Transfers by Insolvent Corporation

ITA
160.4(1) to (3)

Subsection 160.4(1) of the Act applies where a transfer of property has been made by a corporation and, as a consequence of the transfer (or the transfer combined with other transactions), the corporation is precluded under subsection 61.3(3) of the Act from deducting an amount under section 61.3. Where this is the case, the transferee is jointly and severally liable with the transferor under subsection 160.4(1) for the transferor's tax under Part I of the Act for the first taxation year of the transferor that ends after the time of the transfer and for preceding taxation years. The liability of the transferee applies up to the amount, if any, by which the fair market value of the property at the time of the transfer exceeds the fair market value of the consideration given for the property transferred.

In addition, subsection 160.4(2) of the Act provides for joint and several liability of subsequent non-arm's length transferees for the corporation’s Part I tax if the original transferee makes a further non-arm's length transfer and one of the reasons that the transfer was made was to prevent the enforcement of section 160.4.

Under subsection 160.4(3) of the Act, the Minister of National Revenue may assess a transferee for a liability arising under subsections 160.4(1) or (2).

Subsections 160.4(1), (2) and (3) are amended, in respect of assessments made after December 20, 2002, to clarify that such an assessment is subject to interest, without any limit on the amount of interest for which the transferee may be liable.

Clause 157

Penalties

ITA
162

Section 162 of the Act imposes penalties for infractions such as the failure to file a return for a taxation year.

Failure to Provide Identification Number

ITA
162(6)

Subsection 162(6) of the Act provides a penalty for failure by a person or partnership to provide on request their social insurance number or their business number to any person who is required to make an information return in their regard. The French version of this subsection refers to individuals instead of persons, thereby excluding corporations. The provision is therefore amended to replace the word « particulier » by the word « personne ».

This amendment applies after June 18, 1998, the date on which the penalty in subsection 162(6) was extended to corporations in respect of business numbers.

Clause 158

False Statements or Omissions – GSTC Payments

ITA
163(2)(c.1)

Subsection 163(2) of the Act imposes a penalty where a taxpayer knowingly, or in circumstances amounting to gross negligence, participates in or makes a false statement for the purposes of the Act. The penalty is determined with reference to the understatement of tax or the overstatement of amounts deemed to be paid on account of tax. Paragraph 163(2)(c.1) imposes a penalty where the false statement relates to the goods and services tax credit (GSTC).

The GSTC provisions were recently amended (S.C. 2002, chapter 9, formerly Bill C-49) to make the credit more responsive to changes in family circumstances by providing that the eligibility to the credit and the amount paid in each quarter reflect such changes that occurred before the end of the preceding quarter rather than in the preceding taxation year.

Paragraph 163(2)(c.1) is amended to reflect the new quarterly calculation of the GSTC. This amendment applies to amounts deemed to be paid during months specified for the 2001 and subsequent taxation years.

Clause 159

Refunds

ITA
164

Section 164 of the Act contains rules relating to refunds of taxes, including provisions dealing with repayments, application to other debts, and interest.

Refund of Instalment – Hardship

ITA
164(1.51) to (1.53)

New subsections 164(1.51) to (1.53) of the Act, which apply on Royal Assent, allow the Minister of National Revenue to refund excessive instalment amounts paid on account of a taxpayer’s tax liability. In order for such a refund to be made, four conditions must be met. Three of these are set out in new subsection 164(1.51). First, the taxpayer must have paid one or more instalments of tax under Part I or, where the taxpayer is a corporation, Part I.3, VI, VI.1 or XIII of the Act. Second, it must be reasonable to conclude that the total amount of the instalments the taxpayer has paid exceeds the total amount of taxes payable by the taxpayer under those Parts for the year. Third, the Minister must be satisfied that the payment of the instalments has caused or will cause the taxpayer undue hardship.

The last condition is implied in new subsection 164(1.52) of the Act. The availability of an instalment refund in a particular case is a matter of the Minister’s discretion. The final condition is therefore that the Minister agree to make the refund. Similarly, new subsection 164(1.52) makes it clear that the amount of any instalment refund is to be decided by the Minister: the Minister may refund all or any part of an excessive instalment.

New subsection 164(1.53) of the Act provides that, for the purposes of computing interest and penalties, a taxpayer that receives an instalment refund is treated as not having paid the instalment to that extent.

Refund of UI Premium Tax Credit

ITA
164(1.6)

Subsection 164(1.6) of the Act provides rules concerning refunds of the UI premium tax credit. This subsection is repealed consequential to the repeal of section 126.1. For additional information, see the commentary to section 126.1.

This change applies in respect of forms filed after March 20, 2003.

Interest on Refunds and Repayments

ITA
164(3)

Subsection 164(3) of the Act provides for the payment of interest on tax refunds. Two amendments are made to the subsection. First, the preamble of that subsection is being amended to adapt the wording to the new terminology now used elsewhere the Act. Second, the reference to section 126.1 is deleted consequential on the repeal of that section.

These changes apply in respect of forms filed after March 20, 2003.

Clause 160

Large Corporations Tax

ITA
Part I.3

Part I.3 of the Act imposes a tax (generally known as the "large corporations tax") on the amount by which a large corporation’s taxable capital employed in Canada exceeds a $50 million "capital deduction" (shared among related corporations).

Definitions

ITA
181(1)

"financial institution"

Subsection 181(1) of the Act sets out definitions for the purposes of the Part I.3 tax on large corporations. Among these is the term "financial institution," which is relevant for a number of purposes. Most importantly, corporations that are financial institutions compute their capital for the purposes of Part I.3 differently from other corporations. The status of a particular corporation is also relevant to corporations that invest in the particular corporation or hold its debt, since whether certain of those investments are counted in the investor corporation’s "investment allowance" – and thus whether they will reduce their own tax under Part I.3 – depends, in part, on whether the particular corporation is a financial institution.

In addition to listing several types of corporations, the definition "financial institution" provides, in its paragraph (g), that the definition applies as well to a prescribed corporation. Currently, such corporations are prescribed under section 8604 of the Regulations. Paragraph (a) of that regulation provides that a corporation of which all or substantially all of the assets of which are shares or indebtedness of a financial institution (as defined in subsection 181(1) of the Act) to which the corporation is related, is itself prescribed to be a financial institution; the remaining paragraphs list particular corporations by name.

Paragraph (g) of the definition is amended to reflect a fundamental change in the technique by which these corporations will be identified as financial institutions. Rather than listing corporations in a regulation, this new approach is to list them in a schedule to the Act. Amended paragraph (g) therefore refers to corporations that are either listed in the schedule, as per new subparagraph (g)(i), or that are described in new subparagraph (g)(ii), currently paragraph (a) of section 8604 of the Regulations.

These changes to paragraph (g) of the definition apply after December 22, 1997.

As a consequence to the changes to paragraph (g) of the definition, section 8604 of the Regulations is to be repealed and a schedule is added at the end of the Act. Subject to a number of deletions due primarily to name changes and amalgamations, the schedule lists those corporations that are currently prescribed under section 8604 immediately before its repeal. The schedule also lists a number of corporations that are not currently prescribed, but meet the requirements for treatment as financial institutions and have asked to be treated as such.

Transitional rules for paragraph (g) of the definition ensure that corporations prescribed before the repeal of Regulation 8604 retain the status that they would have had under paragraph (g) had it not been amended to exclude prescribed corporations.

As described above, a number of corporations currently not prescribed are listed in the schedule, effective as of dates that precede December 20, 2002. Transitional rules ensure that, for any taxation year that begins before December 20, 2002, no corporation that deals at arm’s length with any of these corporations will lose an investment allowance as a result the corporation’s change in status to a financial institution under paragraph (g) of the definition.

Clause 161

Taxable Capital Employed in Canada

ITA
181.2

Section 181.2 of the Act provides rules for determining the capital, taxable capital, taxable capital employed in Canada and investment allowance of corporations (other than financial institutions) resident in Canada for the purposes of the Part I.3 tax on large corporations.

Section 181.2 is amended in two respects. First, subsections 181.2(3) and (5) of the Act are amended to clarify the effect of tiered partnerships: structures in which one partnership is a member of another partnership. Second, an amendment is made to subsection 181.2(3) to accommodate a change to the accounting presentation of redeemable preferred shares.

Tiered Partnerships

Subsection 181.2(3) defines the "capital" of a corporation, and in paragraph 181.2(3)(g) includes in a corporation’s capital a pro-rata share of the reserves, deferred foreign exchange gains and indebtedness of any partnership of which it is a member. To determine those amounts, the relevant paragraphs of subsection 181.2(3) are applied to the partnership in the same way as they apply to corporations. Paragraph 181.2(3)(g) is amended so that it itself applies on this basis. As a result, the proration of the reserve, deferred gain and debt amounts will carry through any number of tiered partnerships.

Subsection 181.2(4) of the Act provides for the "investment allowance" by which, in broad terms, one corporation’s investment in another is excluded from the first corporation’s taxable capital. Subsection 181.2(5) determines the carrying value of an interest of a corporation in a partnership for this purpose. Subsection 181.2(5) is amended to ensure that the carrying value of an interest of a corporation in a particular partnership, for the purposes of subsection 181.2(4), includes the carrying value of an interest of the particular partnership in another partnership.

These changes to paragraph 181.2(3)(g) and subsection 181.2(5) apply after December 20, 2002.

Preferred Shares

In general, a corporation’s tax payable under Part I.3 of the Act is computed with reference to amounts reflected in the balance sheet of the corporation, as prepared in accordance with generally accepted accounting principles (GAAP).

The Canadian Institute of Chartered Accountants’ Handbook (the Handbook), which is the principal authority of GAAP in Canada, requires that a liability of a corporation in respect of a redeemable preferred share be reflected on the corporation’s balance sheet. The Handbook provides that this liability may be accounted for in one of two ways. Under the first method, the difference between the stated capital of a share and its redemption value is charged to retained earnings, which in some cases may result in the corporation having negative retained earnings or a deficit. Retained earnings are unaffected under the second method, under which a line account is set up reflecting the redemption liability of the preferred shares.

Current paragraph 181.2(3)(i) of the Act allows for a reduction of a corporation’s capital, to the extent of any deficit deducted in computing the corporation’s shareholders’ equity. To accommodate the alternative presentation of a provision for the redemption of preferred shares, the paragraph is amended to refer explicitly to the amount of such a provision.

This amendment applies to taxation years that begin after 1995.

Clause 162

Taxable Capital Employed in Canada of Financial Institution

ITA
181.3

Section 181.3 of the Act provides rules for determining the capital, taxable capital, taxable capital employed in Canada and investment allowance of a financial institution (as defined in subsection 181(1)) for the purposes of the Part I.3 tax on large corporations.

Section 181.3 is amended in two respects. First, changes are made to several paragraphs of subsection 181.3(3) to accommodate a change to the accounting presentation of redeemable preferred shares. Second, a new subparagraph and a new clause are added, respectively, to paragraph 181.3(3)(c) and subparagraph 181.3(3)(d)(iv) to reflect the manner in which property and casualty insurers are required to account for claims reserves.

Preferred Shares

The accounting procedures described in the notes to amended section 181.2 of the Act are relevant to financial institutions as well as to other corporations, and readers may consult those notes for additional background. As in that section, the amendments introduced to section 181.3 include, in the computation of a deficit deducted in computing shareholders’ equity, the amount of any provision for the redemption of preferred shares. This inclusion is added to three specific provisions: subparagraph 181.3(3)(a)(v) in respect of financial institutions other than insurers and authorized foreign banks; subparagraph 181.3(3)(b)(iv) in respect of Canadian-resident life insurance corporations; and subparagraph 181.3(3)(c)(v) in respect of other Canadian-resident insurance companies.

These amendments apply to taxation years that begin after 1995.

Claims Reserves

In general, a corporation is required to compute amounts relevant in determining its tax payable under Part I.3 of the Act using generally accepted accounting principles (GAAP).

The Canadian Institute of Chartered Accountants’ Handbook (the Handbook), which is the principle authority of GAAP in Canada, requires that property and casualty insurers account for claims reserves on a gross basis, rather than net of reinsurance.

Paragraphs 181.3(3)(c) and (d) of the Act stipulate the amounts to be included in determining the capital of an insurance corporation resident in Canada (other than a life insurance corporation) and an insurance corporation not resident in Canada, respectively. Among other things, claims reserves are required under these paragraphs to be included in computing the capital of such a corporation.

New subparagraph 181.3(3)(c)(vii) and clause 181.3(3)(d)(iv)(F) allow such corporations to reduce their capital by an amount that is recoverable through reinsurance, to the extent that the amount relates to an amount that was included in capital as a claims reserve. In this way, claims reserves are included on a net of reinsurance basis under paragraphs 181.3(3)(c) and (d).

New subparagraph 181.3(3)(c)(vii) and clause 181.3(3)(d)(iv)(F) apply to taxation years that begin after 1995.

Clause 163

Additional Tax on Excessive Elections

ITA
Part III

Under section 83 of the Act, a private corporation can identify a dividend as a "capital dividend," with the result that the dividend is not taxable to the shareholders who receive it. In concept, a capital dividend is a distribution of the non-taxable portion of the corporation’s capital gains, which portion is recorded in the corporation’s "capital dividend account". A similar mechanism allows mutual fund corporations and mortgage investment corporations to designate a dividend as a "capital gains dividend" – which is taxable to the shareholder, but as a capital gain.

Part III of the Act (sections 184 and 185) applies a special tax to a corporation that designates as a capital dividend or a capital gains dividend an amount that exceeds the amount available to be paid as such a dividend. If the corporation obtains the consent of its shareholders, it can avoid the special tax by treating the excess amount as a separate taxable dividend.

These amendments simplify Part III and update its language, reduce the rate of the special tax, and modify the requirement for shareholder consent to the recharacterization of an excessive dividend. These amendments apply to dividends that are paid by a corporation after its 1999 taxation year, with a special transitional rule for elections, described below in the notes to subsection 184(5) of the Act.

Tax on Excessive Elections

ITA
184(2)

Subsection 184(2) of the Act applies the tax under Part III of the Act to the amount by which a dividend paid by a corporation as a capital dividend or a capital gains dividend exceeds the amount eligible to be so designated. For greater clarity, the subsection is amended to refer to the full amount of the initial dividend as the "original dividend." That term is then used elsewhere in amended Part III.

The rate of tax imposed by subsection 184(2) is also changed, as part of a series of amendments that reflect recent and planned reductions in tax rates. The rate is reduced from 75% of the excess capital gains dividend to 60% of the excess.

Reduction of Excess

ITA
184(2.1)

Subsection 184(2.1) of the Act is a transitional rule that applies to certain dividends that became payable before June 18, 1987. That subsection has lapsed and is repealed.

Election to Treat Excess as Separate Dividend

ITA
184(3)

Subsection 184(3) of the Act allows a corporation that would otherwise be liable to tax under Part III in respect of an excessive capital dividend or capital gains dividend to treat the excess as a separate taxable dividend, and thus to avoid the tax. The subsection is amended to update and clarify its language.

Concurrence with Election

ITA
184(4)

Subsection 184(4) of the Act sets out the requirements for shareholders’ consent to the recharacterization, under subsection 184(3), of an excessive capital dividend or capital gains dividend. This subsection is amended to update and clarify its language.

Exception for Non-taxable Shareholders

ITA
184(5)

New subsection 184(5) of the Act provides an exception to the shareholder consent requirements of subsection 184(4). Where a corporation wishes to recharacterize an excessive dividend under subsection 184(3), and the dividend was paid on a class of shares all of the holders of which are persons all of whose taxable income is exempt from tax (for example, registered plans), the corporation need not obtain the shareholders’ consent. Instead, the only requirement imposed by new subsection 184(5) is that the corporation’s election be made within 30 months after the time that the original (excessive) dividend became payable.

An election under new subsection 184(5) will be deemed to have been made in a timely manner if it is made within 90 days after these amendments receive Royal Assent.

Clause 164

Revocation Tax

ITA
188(1)

Subsection 188(1) of the Act imposes a tax payable by a registered charity in respect of the revocation of the charity's registration. The tax is generally equal to the total of the value of the assets of the charity plus the amount of receipted donations and inter-charity gifts received by the charity after the "valuation day" of the charity’s assets, net of certain eligible disbursements.

Subsection 188(1) is amended consequential to the addition of new subsection 248(31) of the Act, in respect of gifts made after December 20, 2002, to refer to the "eligible amount" of a gift for which a receipt was issued by the charity. For additional information, see the commentary to new subsection 248(31).

Clause 165

Financial Institutions Capital Tax

ITA
190.13

Section 190.13 of the Act contains the rules for determining the capital of a financial institution for the purpose of Part VI of the Act. Section 190.13 is amended to accommodate a change to the accounting presentation of provisions for the redemption of preferred shares.

Generally accepted accounting principles (GAAP) are relevant to the determination of amounts referred to in section 190.13. The accounting procedures described in the notes to amended section 181.2 of the Act are therefore relevant in the context of Part VI of the Act, and readers may consult those notes for additional background. As in that section, the amendments introduced to section 190.13 include, in the computation of a deficit deducted in computing shareholders’ equity, the amount of any provision for the redemption of preferred shares. This inclusion is added to two specific provisions: subparagraph 190.13(a)(v), in respect of financial institutions other than life insurers and authorized foreign banks; and subparagraph 190.13(b)(iv) in respect of Canadian-resident life insurance corporations.

These amendments apply to taxation years that begin after 1995.

Clause 166

Excluded Dividend – Partner

ITA
191(6)

Section 191 of the Act sets out a number of rules relating to the taxes imposed, under Part VI.1 of the Act, on taxable Canadian corporations that pay dividends of certain kinds. Those taxes are not payable in respect of "excluded dividends," a term defined in subsection 191(1) of the Act. Dividends paid by a corporation to a shareholder that holds a "substantial interest" in the corporation are excluded dividends.

"Substantial interest" is itself defined in subsection 191(2) of the Act. In general, a shareholder has a substantial interest in a corporation if the shareholder is related to the corporation (otherwise than because of a right under paragraph 251(5)(b)) or if the shareholder’s holdings meet certain thresholds in terms of votes and value.

If a shareholder has a substantial interest in a corporation, and is also a member of a partnership that holds shares of the corporation, it is appropriate that a dividend paid by the corporation to the partnership be an excluded dividend, to the extent of the shareholder’s interest in the dividend. To ensure this result, new subsection 191(6) is added to the rules that govern the Part VI taxes. The new subsection provides that a dividend paid to a partnership is, for the purposes of the "excluded dividend" definition, considered to have been paid ratably to each member of the partnership.

Three technical aspects of the new rule bear special mention. First, the apportionment of the dividend among the partners is based upon each partner’s share of the partnership’s income for its last fiscal period that ended before the corporation paid the dividend. (If the dividend was paid during the partnership’s first fiscal period, the apportionment looks to that period.)

Second, to ensure appropriate effects where there is more than one tier of partnerships between the dividend-paying corporation and the person that holds a substantial interest in the corporation, the new provision applies to itself. That is, if a member of a partnership is itself a partnership, the rule will treat the dividend-paying corporation as having paid a proportionate amount as a dividend not only to the second partnership, but also to that second partnership’s members.

Third, in apportioning a dividend among members of a partnership, new subsection 191(6) uses the new definition of "specified proportion," which is added to subsection 248(1) of the Act. For further information, see the commentary to that amendment.

New subsection 191(6) applies to dividends paid after December 20, 2002.

Clause 167

Tax on Taxable Dividends

ITA
191.1(1)(a)

Subsection 191.1(1) of the Act provides for a tax to be paid by a corporation that has paid taxable dividends on taxable preferred shares. In the case of short-term preferred shares, paragraph 191.1(1)(a) sets the rate of the tax at 66 2/3% of the dividend. This rate produces an amount of tax equal to the amount of income tax that would have been collected had a corporate shareholder sought the same after-tax return in the form of interest. That result obtains, at the current 66 2/3 percent rate, if interest income is assumed to be taxed at 40%.

As part of a series of amendments reflecting recent and planned reductions in income tax rates, the rate of tax under paragraph 191.1(1)(a) is reduced to 50% of the dividend amount. This provides the desired result on the basis of an assumed tax of 33.3% on interest income, as shown below.

 

Dividend

Interest


Issuer

   

To Holder

$66.67

$100.00

191.1(1)(a) tax

33.33

n/a

 

Total paid

$100.00

$100.00

Shareholder

   

Receives

$66.67

$100.00

Part I tax

NIL

33.33

 

After tax

$66.67

$66.67

This amendment applies to the 2003 and subsequent taxation years.

Clause 168

Distribution Deemed Disposition

ITA
200

The French version of section 200 of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 169

Labour-sponsored Venture Capital Corporations

ITA
204.81(1), (1.1) and (1.2)

Section 204.81 of the Act sets out the conditions for the registration of labour-sponsored venture capital corporations (LSVCCs). Subsection 204.81(1) permits the Minister of National Revenue to register a corporation as an LSVCC under Part X.3 if its articles satisfy specified conditions, and other requirements are met. Subparagraph 204.81(1)(c)(v) sets out the requirements of a federally-registered LSVCC’s articles regarding the circumstances in which the LSVCC may redeem shares of its capital stock. The current rule generally provides, pursuant to clause 204.81(1)(c)(v)(E), a minimum holding period of eight years for corporations that are incorporated after March 5, 1996.

Clause 204.81(1)(c)(v)(E) is amended to require that the articles of a federally-registered LSVCC provide that the LSVCC shall not redeem its shares unless the redemption occurs either

This amendment applies to corporations after February 6, 2000 regardless of when they were incorporated.

However, federally-registered LSVCCs that were incorporated before March 6, 1996 may contain statements in their articles that provide that the LSVCC shall not redeem certain of its shares unless the redemption occurs more than five years after the day on which such a share was issued. New subsection 204.81(1.1) provides that in applying clause 204.81(1)(c)(v)(E), at any time before 2004, in respect of a corporation incorporated before March 6, 1996, the references in that clause to the word "eight" are replaced with references to the word "five" if, at that time, the relevant statements in the corporation’s articles refer to the word "five". This is intended to ensure that the extended (February, or March 1st) redemption provisions required of a federally-registered LSVCC’s articles apply equally to shares originally subject to a minimum five year holding period and those subject to a minimum eight year holding period.

New subsection 204.81(1.2) is a transitional rule that provides a federally-registered LSVCC, incorporated before February 7, 2000, with a reasonable amount of time to amend its articles as required by clause 204.81(1)(c)(v)(E). Subsection 204.81(1.2) provides that, in applying subsection 204.81(1) at any time before 2004 to such an LSVCC, if the LSVCC’s articles comply with subclause 204.81(1)(c)(v)(E)(I) (as modified by subsection 204.81(1.1)) those articles are deemed to provide the statement required by subclause 204.81(1)(c)(v)(E)(II).

New subsections 204.81(1.1) and (1.2) apply after February 6, 2000. These amendments are part of a set of amendments, announced by the Minister of Finance (News Release 2000-009, dated February 7, 2000) concerning the redemption requirements for federally-registered LSVCCs. For information on a related amendment, see the commentary to subsection 211.8(1) of the Act.

Clause 170

Transfers Between Plans

ITA
204.9(5)

The French version of section 200 of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 171

Foreign Property Rules

ITA
Part XI

Part XI of the Act set out rules for a 1% per month penalty tax on excess foreign property held by deferred income plans. Part XI was repealed, effective for months that end after 2004, in Budget Implementation Act, 2005, S.C. 2005, c.30. A number of amendments are being made to Part XI that are effective prior to its repeal.

Definitions

ITA
206(1)

"cost amount"

"Cost amount" is defined in subsection 206(1) of the Act for the purposes of Part XI. The definition was introduced in 2001 to deal with arrangements that provided for trust income to be "capitalized" without the trust issuing new units. Under the definition, the cost amount otherwise determined of a taxpayer’s interest in such a trust reflects the capitalized amounts. The definition is amended to clarify that it applies to trusts under which all beneficiaries are registered plan trusts (e.g., trusts described in paragraph (e) of the definition "trust" in subsection 108(1)). This amendment applies to months that end after December 20, 2002 and before 2005.

"foreign property"

"Foreign property" is defined in subsection 206(1) of the Act. Under paragraph (d.1) of the definition, foreign property includes certain shares and debt issued by Canadian corporations, if shares of the corporation may reasonably be considered to derive their value primarily from foreign property. Paragraph (g) of the definition treats as foreign property the indebtedness of a non-resident person other than indebtedness issued by various international organizations or indebtedness issued by an authorized foreign bank and payable at a Canadian branch of that bank.

Paragraphs (d.1) and (g) are amended to provide that a mortgage obligation that is fully secured by real property situated in Canada is not foreign property. These amendments apply to months that end after October 2003 and before 2005.

"specified proportion"

Subsection 206(1) of the Act includes a definition of a partner’s "specified proportion" of a partnership for a fiscal period. To enable the definition to be used for other purposes as well, it is moved to subsection 248(1) of the Act, and is repealed in subsection 206(1), effective after December 20, 2002.

Acquisition of Qualifying Security

ITA
206(3.1)

The French version of subsection 206(3.1) of the Act is amended to correct an erroneous reference. The reference to subparagraph 206(2)(a)(iii), which does not exist in the French version of the Act, is replaced by a reference to subparagraph 206(2)(a)(ii). This amendment applies to months that end after 1997, which corresponds to the application of the last amendment to subsection 206(3.1).

Clause 172

Tax Payable by Recipient of an Ecological Gift

ITA
207.31

Section 207.31 of the Act imposes a tax on charities and Canadian municipalities where, without the approval of the Minister of the Environment, they dispose of or change the use of property donated to them as an ecological gift. The tax is equal to 50% of the amount that is the fair market value of the property at the time of the disposition or change in use as determined for the purposes of section 110.1 or 118.1 of the Act.

Section 207.31 is amended, in respect of dispositions of or changes of use of property after ANNOUNCEMENT DATE, to clarify that it also applies to a public body performing a function of government in Canada. For more information, refer to the commentary for subsection 118.1(1) and paragraph 149(1)(d.5).

Clause 173

Tax on Designated Income of Certain Trusts

ITA
Part XII.2

Part XII.2 of the Act imposes a special tax on the designated income (as defined in subsection 210.2(2) of the Act) of certain trusts that are resident in Canada with respect to distributions to non-residents and other designated beneficiaries. One of the objectives of Part XII.2 tax is to prevent the minimization of tax on specified Canadian-source income that would otherwise arise where a Canadian trust's income is distributed to a non-resident and is subject only to Part XIII tax. Part XII.2 tax is also meant to discourage transactions between taxable and tax-exempt beneficiaries designed to allow taxable income earned by a trust to be flowed-through to tax-exempt beneficiaries after the acquisition of a trust unit by the tax-exempt beneficiary from the taxable beneficiary.

Definitions and Application

ITA
210

Section 210 of the Act defines "designated beneficiary" for the purpose of Part XII.2.

Section 210 is amended so that a number of definitions that apply for the purposes of Part XII.2 are now found in new subsection 210(1). In addition, new subsection 210(2) replaces section 210.1 of the Act, which is being repealed.

Definitions

ITA
210(1)

New subsection 210(1) of the Act contains the definitions "designated beneficiary" (previously found in section 210 of the Act) and "designated income" (previously found in subsection 210.2(2) of the Act). These definitions apply in Part XII.2.

"designated beneficiary"

Under paragraphs (a) and (b) of the definition "designated beneficiary", a designated beneficiary includes, respectively, a non-resident person and a non-resident-owned investment corporation. Under paragraph (c) of the definition, a person exempt from tax under Part I of the Act is treated as a designated beneficiary because of owning an interest in a trust (acquired from a beneficiary under the trust) unless, generally speaking, no taxable entity previously owned that interest. Under paragraph (d) of the definition, a trust is a designated beneficiary of another trust if a beneficiary of the trust includes, generally, either a person or partnership described in any of paragraphs (a), (b), (c) or (e) of the definition or another trust (other than a testamentary trust resident in Canada). Under paragraph (e) of the definition, a partnership is a designated beneficiary of a trust if a member of the partnership is a person described in paragraph (a), (b) or (d) of the definition, another partnership or a person exempt from tax under Part I by reason of subsection 149(1) of the Act.

The opening words of the definition "designated beneficiary" are amended so that the references in the definition to a "trust" under which there may be a designated beneficiary are references to a "particular trust".

Paragraph (c) of the definition "designated beneficiary" is amended to clarify that a designated beneficiary of a particular trust includes, except as provided in subparagraphs (c)(i) and (ii) of the definition, a person who is, because of subsection 149(1), exempt from tax under Part I on all or part of their taxable income and who acquired an interest in the particular trust after October 1, 1987 directly or indirectly from a beneficiary under the particular trust.

Paragraph (d) of the definition "designated beneficiary" is amended so that a designated beneficiary of a particular trust includes another trust (in this commentary referred to as the "other trust") having as a beneficiary any one of the following persons or partnerships:

Note that a person or partnership that is a beneficiary of the other trust need only be described in any of one of subparagraphs (d)(i) to (iv) in order for the other trust to be a designated beneficiary of the particular trust. Note also that references in paragraph (d) of the definition to the expression "resident in Canada" are removed as these are unnecessary given that paragraph (a) of the definition provides that a non-resident person is a designated beneficiary.

Paragraph (d) of the definition is also amended to provide that the other trust will not be treated, under that paragraph, as a designated beneficiary of the particular trust if it is a testamentary trust, a mutual fund trust, or a trust that is exempt because of subsection 149(1) from tax under Part I on all or part of its taxable income. However, these excluded trusts may be treated as designated beneficiaries of the particular trust under paragraphs (a) or (c) of that definition (e.g., a non-resident testamentary trust).

Amended paragraph (e) of the definition provides, in new subparagraph (e)(i), that a designated beneficiary of a particular trust includes a particular partnership any of the members of which is another partnership. However, no such other partnership will cause the particular partnership to be a designated beneficiary under the particular partnership if

Under subparagraphs (e)(ii) to (iv), a particular partnership will be a designated beneficiary under a particular trust if any one of the partnership's members is a non-resident person, a non-resident-owned investment corporation, or a specified person. For this purpose, a specified person means a trust that is a designated beneficiary of the particular trust because of paragraph (d) of the definition or a trust that would be such a designated beneficiary on the following assumptions: the other trust were at that time a beneficiary under the particular trust whose interest as a beneficiary under the particular trust were

New subparagraph (e)(v) of the definition provides that a particular partnership will be a designated beneficiary of a particular trust if any of the members of the particular partnership is a person exempt because of subsection 149(1) from tax under Part I on all or part of its taxable income, unless the interest of the particular partnership in the particular trust was held, at all times after the day on which the interest was created, by the particular partnership or by persons who were exempt because of subsection 149(1) from tax under Part I on all of their taxable income.

Note that, for the purposes of the definition "designated beneficiary", a new rule in section 132.2 applies in respect of certain trust units acquired by a beneficiary under a "qualifying exchange" (as defined in subsection 132.2(1)). For more detail, see the commentary on section 132.2.

Note as well that paragraph 210.2(3)(b) is amended to ensure that subsection 210.2(3) does not apply to a non-resident person that would be a designated beneficiary under the trust if the definition "designated beneficiary" in subsection 210(1) were read without reference to its paragraph (a). This amendment applies to the 1996 and subsequent taxation years.

This amendment applies to the 1996 and subsequent taxation years.

"designated income"

The tax under Part XII.2 of the Act is calculated by reference to a trust's "designated income" (as determined under subsection 210.2(2)).

Subsection 210.2(2) is being replaced (for more detail, see the commentary below) and the definition "designated income" is now found in subsection 210(1) of the Act.

Paragraphs (a), (b) and (d) of the new definition "designated income" in subsection 210(1) are largely unchanged from the equivalent provisions found in repealed subsection 210.2(2).

Paragraph (c) of the new definition replaces paragraph 210.2(2)(b). Under subparagraph (c)(i), designated income is calculated by reference to taxable capital gains and allowable capital losses from dispositions of the trust's taxable Canadian property. Subparagraph (c)(ii) provides that a trust's designated income is also calculated by reference to taxable capital gains and allowable capital losses from a disposition by the trust of particular property (other than property described in any of subparagraphs 128.1(4)(b)(i) to (iii) of the Act).

In this context, particular property (or property for which the particular property is a substitute) must be property (referred to in this commentary as the "transferred property") that was transferred to a particular trust in circumstances in which subsection 73(1) or 107.4(3) of the Act applied. This condition will be met whether the particular trust is the trust in respect of which the designated income is being determined, or any other trust to which the transferred property was transferred in circumstances in which subsection 73(1) or 107.4(3) applied and that subsequently transferred, directly or indirectly, the property to the trust in respect of which the designated income is being determined.

In addition, clauses (c)(ii)(A) and (B) of the definition require

These amendments generally apply for the 1996 and subsequent taxation years. Subparagraph (c)(ii) of the definition as described above applies, in effect, to dispositions, of property by a trust, that occur after December 20, 2002.

Application of Part XII.2

ITA
210(2) and 210.1

Section 210.1 of the Act provides a list of types of trusts to which Part XII.2 does not apply.

Section 210.1 is being repealed. The list of types of trusts to which Part XII.2 does not apply is now found in new subsection 210(2). New subsection 210(2), consequential on the amendments to the definition "designated beneficiary" (described in the commentary above), also clarifies that it applies only to determine to which trusts the special Part XII.2 tax does not apply. Subsection 210(2) does not apply, for example, to determine whether a trust referred to in that subsection may have a designated beneficiary.

This amendment applies to the 1996 and subsequent taxation years.

Clause 174

Amateur Athlete Trusts

ITA
210.2(2)

Subsection 210.2(1.1) of the Act extends the tax under Part XII.2 to amateur athlete trusts, which are provided for in section 143.1, in circumstances where amounts are distributed by such trusts to non-resident beneficiaries.

Subsection 210.2(1.1) of the Act is amended by renumbering it as subsection 210.2(2). In addition, the reference in that subsection to section 210.1 is, given that section’s renumbering as subsection 210(2), replaced with a reference to subsection 210(2). The amended subsection also replaces the existing reference to the phrase "36% of 100/64" with the numerical equivalent of "56.25%". Finally, the provision is amended to clarify that Part XII.2 tax applies to a trust for a particular taxation year of the trust on the amount that is required by subsection 143.1(2) to be included in computing the income under Part I for a taxation year of a beneficiary under the trust, only if

This amendment applies to the 1996 and subsequent taxation years.

Clause 175

Part XII.4

ITA
211.6(1)

Part XII.4 imposes a special tax on qualifying environmental trusts, as defined under subsection 248(1). Subsection 211.6(1) is the charging provision of Part XII.4. It requires a qualifying environmental trust to pay a tax equal to 28% of its income for the year.

Subsection 211.6(1) is amended to provide that a trust that is described by new paragraphs 149(1)(z.1) or (z.2), even if it is a qualifying environmental trust, is not subject to Part XII.4 tax.

This amendment applies to the 1997 and subsequent taxation years.

Clause 176

Recovery of Labour-sponsored Funds Tax Credit

ITA
Part XII.5

Part XII.5 of the Act (sections 211.7 to 211.9) provides for a special tax that is designed to recover the federal tax credit under section 127.4 of the Act with respect to the original acquisition of a share issued by a labour-sponsored venture capital corporation (LSVCC). This tax applies where there is a disposition of an "approved share", as defined in subsection 127.4(1) of the Act.

Disposition of Approved Share

ITA
211.8(1)

Subsection 211.8(1) of the Act provides that the special tax under Part XII.5 generally applies where shares in a federally-registered LSVCC that qualify for the federal LSVCC tax credit are redeemed prior to the expiry of a minimum period. In the case of shares the "original acquisition" (as defined in subsection 127.4(1) of the Act) of which occurred before March 6, 1996, there is no recovery of the tax credit for a share redeemed more than five years after the day on which the share was issued. For shares the original acquisition of which occurs after March 5, 1996, the recovery generally applies where a share is redeemed less than eight years after the day on which it was issued.

Subsection 211.8(1) is amended so that there is no Part XII.5 tax in respect of the redemption by a federally-registered LSVCC of a share the original acquisition of which was after March 5, 1996, if the redemption occurs on a day that is in February or on March 1st of a calendar year and that day is no more than 31 days before the day that is eight years after the day on which the share was issued. For a share the original acquisition of which occurred before March 6, 1996, the circumstances in which there is no recovery of the tax credit are extended to include the redemption of the share on a day that is in February or on March 1st of a calendar year if that day is no more than 31 days before the day that is five years after the day on which the share was issued.

This amendment applies to redemptions, acquisitions, cancellations and dispositions that occur after November 15, 1995.

This amendment is part of a set of amendments, announced by the Minister of Finance (News Release 2000-009, dated February 7, 2000) concerning the redemption requirements for federally-registered LSVCCs. The set of amendments is intended to accommodate taxpayers wishing to acquire new LSVCC shares in the first 60 days of a year using the proceeds from the redemption of LSVCC shares. Other related changes include amendments to section 204.81 of the Act. For additional information, see the commentary on those provisions.

Example 1

On February 2nd, 1998 a federally-registered LSVCC redeemed 200 Class A shares owned by Charles. The original acquisition by Charles of the shares was on March 1, 1993, the same day on which the shares were issued. The issuing LSVCC was incorporated on December 1, 1992. The LSVCC’s Articles comply with the applicable registration requirements.

Results:

1. Under new clause (i)(C) of the description of B in paragraph 211.8(1)(a), there will be no recovery of the tax credit on the redemption of the 200 shares because the original acquisition of the shares was before March 6, 1996 and the redemption occurred on a day in February not more than 31 days before the day that is five years after the day on which the shares were issued.

2. Because of new subsection 204.81(1.2), subsection 204.81(6) of the Act would not apply to allow the Minister of National Revenue to revoke the LSVCC’s registration solely because of the redemption.

Example 2

On February 15, 2005 a federally-registered LSVCC redeemed 200 Class A shares owned by Marguerite. The circumstances of the redemption are not described in any of the provisions, described in clauses 204.81(1)(c)(v)(A) to (D) of the Act, of the LSVCC’s articles. The original acquisition by Marguerite of the first 100 shares was on March 1, 1997, although the shares were issued on March 12th, 1997. The original acquisition by Marguerite of the second 100 shares was on February 29, 2000, the same day on which the shares were issued. The LSVCC was incorporated on May 1, 1996.

Results:

1. Under new subparagraph (i.1) of the description of B in paragraph 211.8(1)(a), there will be no recovery of the tax credit on the redemption of the first 100 shares because the redemption occurred in February on a day not more than 31 days before the day that is eight years after the day on which the shares were issued. Subparagraph (i) of the description of variable B in paragraph 211.8(1)(a) does not apply because the original acquisition of the shares was not before March 6, 1996.

2. Under new subparagraph (i.1) of the description of B in paragraph 211.8(1)(a), there will be a recovery of the tax credit on the redemption of the second 100 shares because the redemption occurred less than eight years after the day on which the share was issued and more than 31 days before the day that is eight years after the day on which the shares were issued.

3. Because of new subsection 204.81(1.2), subsection 204.81(6) would not apply to allow the Minister of National Revenue to revoke the LSVCC’s registration solely because of the redemption of the first 100 shares. However, the early redemption by the corporation of the second 100 shares, in violation of the provisions of its articles described in clause 204.81(1)(c)(v)(E), authorizes the Minister of National Revenue to revoke the LSVCC's registration under subsection 204.81(6).

Clause 177

Taxation of Non-residents

ITA
Part XIII

Part XIII of the Act applies a tax on certain amounts paid by a person resident in Canada to a non-resident person.

Non-resident Withholding Tax – Interest

ITA
212(1)(b)(iv)

Paragraph 212(1)(b) of the Act both applies tax under Part XIII of the Act to interest paid or credited by a person resident in Canada to a non-resident person and includes a number of exemptions from the tax. One of these, in subparagraph 212(1)(b)(iv), is for interest payable to an arm’s length person who holds a valid "certificate of exemption". These certificates, issued by the Minister of National Revenue under the authority provided by subsection 212(14) of the Act, are generally available to foreign pension entities, charities and certain other tax-exempt entities.

In its current form, subparagraph 212(1)(b)(iv) applies only to interest on a "bond, debenture or similar obligation." Since this restriction may unduly limit the scope of the provision, it is broadened to encompass all forms of indebtedness. It should be noted, however, that no change is made to the requirement that the Canadian-resident payer of the interest and the non-resident recipient deal at arm’s length.

This amendment applies to the 1998 and subsequent taxation years.

ITA
212(1)(b)(xii)

Subparagraph 212(1)(b)(xii) provides an exemption for interest payable under certain securities lending arrangements by registered or licensed securities dealers resident in Canada. Given the current definition of "securities lending arrangement" in subsection 260(1) of the Act, this exemption is only available to dealers who are dealing at arm’s length with the other parties to the arrangements.

Consequential to the amendments to the definition of "securities lending arrangement" in subsection 260(1), which now includes certain arrangements between non-arm’s length parties, the amendment to subparagraph 212(1)(b)(xii) confirms that the exemption is limited to arm’s length arrangements.

This amendment applies to arrangements made after 2002.

Non-resident Withholding Tax - Interest

ITA
212(1)(b)(xiii)

Securities lending arrangements often include an obligation for one party to compensate the other for certain income amounts. In the absence of special rules, these compensation payments may be subject to tax under Part XIII if they are paid by a person resident in Canada to a non-resident person.

New subparagraph 212(1)(b)(xiii) exempts from tax under Part XIII certain interest compensation payments made to a non-resident by a borrower resident in Canada under a securities lending arrangement. For this exemption to apply,

This amendment applies to securities lending arrangements entered into after May 1995, except that, before 2002, the reference to "subparagraph 260(8)(c)(i)" should be read as "subparagraph 260(8)(a)(i)".

Estate and Trust Income

ITA
212(1)(c)

The French version of paragraph 212(1)(c) is amended to replace the term "paiement" with the term "distribution" for consistency with other provisions of the Act dealing with amounts distributed by trusts and estates. This amendment will come into force on Royal Assent.

Rents, Royalties, etc.

ITA
212(1)(d)

Paragraph 212(1)(d) of the Act describes various amounts, in the nature of rent, royalties and similar payments, on which tax under Part XIII of the Act is imposed. Subparagraphs 212(1)(d)(vi) through (xi) list payments to which the tax does not apply. Three changes have been made to paragraph 212(1)(d).

First, subparagraph 212(1)(d)(iv), which concerns payments made in respect of an agreement between a person resident in Canada and a non-resident person under which the non-resident person agrees not to use or not to permit any other person to use any thing referred to in subparagraph (d)(i), is amended so that it does not apply to certain restrictive covenant amounts to which new paragraph 212(1)(i) applies. This change applies to amounts paid or credited after October 7, 2003.

Second, subparagraph 212(1)(d)(xi), which currently provides that Part XIII tax does not apply to payments made to an arm's length person for the use of property that is an aircraft, certain attachments thereto as well as to spare parts for such property, is amended, applicable after July 2003, to also apply to air navigation equipment utilized in the provision of services under the Civil Air Navigation Services Commercialization Act, and to computer software that is necessary to the operation of that equipment that is used by the payer for no other purpose.

Third, new subparagraph 212(1)(d)(xii) clarifies that subsection 212(5) of the Act, which is amended as described below, is the sole provision in Part XIII that applies the tax to payments for rights in or to use a film or video that is used or reproduced in Canada. This change applies for the 2000 and subsequent taxation years.

Restrictive Covenant Amount

ITA
212(1)(i)

New paragraph 212(1)(i) of the Act includes, as amounts subject to the withholding tax, two amounts. First, the withholding tax applies to an amount in respect of a restrictive covenant to which new subsection 56.4(2) applies. Second, the withholding tax applies to an amount to which new paragraph 56(1)(m) applies (an amount received on a bad debt previously deducted).

New paragraph 212(1)(i) applies to amounts paid or credited after October 7, 2003.

Exempt Dividends

ITA
212(2.1)

New subsection 212(2.1) is added to exempt from Part XIII tax certain dividend compensation payments made to a non-resident by a Canadian securities borrower under a securities lending arrangement if

This amendment applies to securities lending arrangements entered into after May 1995, except that, before 2002, the reference to "subparagraph 260(8)(c)(i)" should be read as "subparagraph 260(8)(a)(i)".

Replacement Obligations

ITA
212(3)

Among the exceptions to the imposition of tax under Part XIII of the Act on interest is one found in subparagraph 212(1)(b)(vii) for interest paid by a corporation resident in Canada on its medium- and long-term arm's length debt. Subsection 212(3), which applies for the purpose of subparagraph 212(1)(b)(vii), allows a corporation in certain circumstances of financial difficulty to treat a debt obligation that replaces another as having been issued when that other obligation was issued. The circumstances in which this is possible are set out in paragraphs 212(3)(a) to (c). Paragraph 212(3)(b) requires that, for the subsection to apply, it must be possible to regard the proceeds of the replacement borrowing as being used in financing an active business that was carried on in Canada, by the issuing company or one with which it does not deal at arm's length, immediately before the replacement obligation was issued.

There is no clear basis in tax policy for this requirement. The condition in paragraph 212(3)(b) is repealed for replacement debt obligations that are issued after 2000.

Motion Picture Films

ITA
212(5)

Subsection 212(5) of the Act applies tax under Part XIII to, in general terms, any amount that a person resident in Canada pays to a non-resident person for a right in or to the use of a motion picture film or video product that has been or is to be used or reproduced in Canada (otherwise than for a news program). As presently worded, the subsection can be read as applying even if the payment in question is not for that Canadian use or reproduction, but relates instead to employment of the film or video in some other country. Accordingly, subsection 212(5) is amended to impose tax only to the extent that the amount of the payment relates to the use or reproduction of the product in Canada. This amendment applies to the 2000 and subsequent taxation years.

Exemptions

ITA
212(9)

Subsection 212(9) of the Act provides an exemption from withholding tax under Part XIII of the Act with respect to certain amounts of a trust's income that are paid or credited to a non-resident beneficiary under the trust and that would otherwise be subject to withholding tax under paragraph 212(1)(c). The exemption currently applies only in respect of amounts that are attributable to income of the trust in the form of: dividends or interest received by the trust from a non-resident-owned investment corporation; certain artistic royalties; and interest, where the trust is a mutual fund maintained primarily for the benefit of non-resident persons. If no Part XIII tax would have been payable with respect to the dividends, interest or royalties if they had been paid directly to the beneficiary, no Part XIII tax is payable with respect to a distribution from trust income to non-resident beneficiaries that derives from the dividends, interest or royalties.

Subsection 212(9) is amended to add a fourth type of trust income to this list of exemptions. In certain circumstances, Canada’s Superintendent of Financial Institutions may require a non-resident reinsurer that reinsures Canadian risks to place assets in a trust in Canada. Such a "reinsurance trust" may earn dividend or interest income, which is payable to the non-resident. In recognition of the regulatory requirement for these trusts, subsection 212(9) is amended to provide that, if the dividends or interest would not have borne Canadian tax if the non-resident had earned them directly, they may be distributed to the non-resident free of Part XIII tax.

This amendment applies to amounts paid or credited to non-residents after 2000.

Rent and Other Payments

ITA
212(13)

Subsection 212(13) of the Act imposes non-resident withholding tax on certain payments made by one non-resident to another non-resident. Subsection 212(13) is amended to add new paragraph (g), which imposes non-resident withholding tax on amounts paid or credited by a non-resident for a restrictive covenant to which new paragraph 212(1)(i) applies, if the amount affects, or is intended to affect, in any way whatever,

New paragraph 212(13)(g) applies to amounts paid or credited after October 7, 2003.

Application of Part XIII Tax Where Non-Resident Operates in Canada

ITA
212(13.2)

Subsection 212(13.2) of the Act is one of several provisions that extend Part XIII tax to apply in particular circumstances - in this case, for the most part, the payment by a non-resident of royalties and similar amounts in respect of a Canadian income source. The principle that underlies subsection 212(13.2) is that if a non-resident has Canadian-source business or resource income, and can deduct in computing that income (strictly speaking, in computing "taxable income earned in Canada") a payment to another non-resident, that payment ought to be treated for purposes of Part XIII tax as though it had been made by a person resident in Canada. This is accomplished by treating the first non-resident - the one making the payment - as a person resident in Canada for those purposes.

In its current form, subsection 212(13.2) applies only if the non-resident making the payment carries on business principally in Canada, manufactures or processes goods in Canada or carries out any of various resource activities here. On the other hand, the rule does not explicitly link that business or activity to the deductibility of the payment: it can be read as applying whether or not the payment is made in relation to the particular business or activity.

Accordingly, subsection 212(13.2) is amended to apply in respect of any portion of a payment (other than one to which the generally comparable rule in subsection 212(13) applies) made by one non-resident person to another that is deductible in computing the first non-resident's taxable income earned in Canada from any source. The only exceptions are payments that are deductible in respect of treaty-protected businesses or treaty-protected properties (as defined in subsection 248(1) of the Act).

This amendment applies to amounts paid or credited under obligations entered into after December 20, 2002.

Tax on Registered Securities Dealers

ITA
212(19)

Subsection 212(19) of the Act imposes a tax on Canadian-resident registered securities dealers that enter into certain securities lending arrangements described in subparagraph 212(1)(b)(xii) of the Act. The tax is calculated, by formula, based in part on the capital or the margin requirement of the relevant provincial laws governing the registration or license of securities dealers.

An earlier amendment to subsection 212(19) removed a reference to the provincial laws under which the taxpayer is registered or licensed. The subsection is further amended, as a consequence of that earlier change, to replace the words "those laws" in subparagraph (b)(i) of the description of B in the formula (which no longer have any clear antecedent), with a specific reference to the provincial legislation that govern the registration or license of securities dealers.

This amendment applies to securities lending arrangements entered into after May 28, 1993.

Clause 178

Deemed Payments

ITA
214(3)

The French version of paragraph 214(3)(k) of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 179

Alternative re Rents and Timber Royalties

ITA
216

Section 216 of the Act allows a non-resident person to file a return of income under Part I in respect of rent on real property in Canada or timber royalties and to pay, instead of the non-resident withholding tax under Part XIII, tax under Part I on the basis of the non-resident's income from the rent or royalties.

Subsection 216(1), which provides the basic rule permitting a non-resident to be taxed under Part I of the Act on this income, is amended to improve its structure and language. Most of the changes are stylistic; the amendment also updates the subsection’s reference to the form of the non-resident’s Part I tax return, to reflect the implementation of a special return for these non-residents. This amendment applies to taxation years that end after December 20, 2002.

In general terms, subsection 216(5) of the Act requires that a person who has previously made an election under subsection 216(1), and who has claimed capital cost allowance in computing income under the subsection, must file a return of income for the year in which the property that was the subject of the election is disposed of. Subsection 216(5) is modified in the same manner as subsection 216(1), again with the main change being an updated description of the relevant form. This amendment applies to taxation years that end after December 20, 2002.

Subsection 216(7) of the Act provides that the rules in section 61 of the Act, dealing with income averaging annuity contracts, do not apply in computing a non-resident person’s income for a taxation year in respect of which subsection 216(5) applies to the person. Since section 61 is no longer relevant to any current transaction, subsection 216(7) is repealed. This repeal takes effect on Royal assent.

Clause 180

Security for Tax on Distributions of Taxable Canadian Property to Non-resident Beneficiaries

ITA
220(4.6) and (4.61)

The French version of subsections 220(4.6) and (4.61) of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 181

Records and Books

ITA
230(2)

Subsection 230(2) of the Act requires that registered charities and registered Canadian amateur athletic associations keep books and records containing information that will enable the Minister of National Revenue to determine whether there are grounds for the revocation of their registration.

The French version of this subsection is amended to replace the expression « motifs d'annulation » by the expression « motifs de révocation » in order to be consistent with the terminology used in sections 149.1 and 168 of the Act, which authorize the Minister to revoke the registration of these charities and associations.

This amendment applies on Royal Assent.

ITA
230(3)

Subsection 230(3) provides that where a person has failed to keep adequate records and books of account, the Minister of National Revenue may require them to keep such records and books as the Minister specifies. The French version of this subsection is amended to correct grammatical errors.

This amendment applies on Royal Assent.

Clause 182

Requirement to Provide Documents or Information

ITA
231.2(1)

Subsection 231.2(1) of the Act provides that, notwithstanding any other provision of the Act, the Minister of National Revenue may by notice require that any person provide information or any document for any purpose relating to the administration or enforcement of the Act. An exception is made where the information or document relates to an unnamed person or persons, in which case the procedure set out in subsections 231.1(2) to (6) of the Act must be followed.

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

A "listed international agreement" is newly defined in subsection 248(1) to mean the Convention on Mutual Administrative Assistance in Tax Matters, concluded at Strasbourg on January 25, 1988 and the Convention between the Government of Canada and the Government of the United Mexican States for the Exchange of Information with Respect to Taxes, signed at Mexico City on March 16, 1990. 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.

This amendment applies on Royal Assent.

Clause 183

Tax Shelters

Definitions

ITA
237.1(1)

Subsection 237.1(1) of the Act provides definitions of terms that apply for the purpose of tax shelter identification and the definition of "tax shelter investment" in subsection 143.2(1) of the Act. The definition "gifting arrangement" includes an arrangement in respect of which it may reasonably be expected, having regard to representations made, that if a taxpayer makes a gift or political contribution under the arrangement, a person (whether or not it is the taxpayer) will incur an indebtedness in respect of which recourse is limited. This definition is amended in respect of gifts and contributions made after 6:00 p.m. (EST), December 5, 2003, to also refer to a limited-recourse debt determined under new subsection 143.2(6.1) of the Act. For additional details regarding limited-recourse debt in respect of a gift, see the commentary to subsection 143.2(6.1).

Clause 184

Provision of Information

ITA
241

Section 241 of the Act prohibits the use or communication by an official of taxpayer information obtained under the Act unless specifically authorized by one of the exceptions found in that section.

Disclosure of Information – Registered Charities

ITA

241(3.2)

Paragraph 241(3.2)(h) of the Act permits a government official to release information that a registered charity has filed in support of an application for special status or an exemption under the Act, as well as any response to such an application (e.g., a request for permission to accumulate assets). Paragraph 241(3.2)(h) is amended, applicable upon Royal Assent, to include information relating to an application made under subsection 149.1(5) of the Act for an amount to be deemed an expenditure on charitable activities carried on by the charity.

Disclosure of Taxpayer Information

ITA
241(4)

Subsection 241(4) of the Act authorizes the limited communication of information to government officials outside of the Canada Revenue Agency.

New subparagraph 241(4)(d)(xv) allows information in respect of film or video productions to be communicated to officials of an office or agency of the government of Canada or of a province that provides a program of assistance for such productions. The information may be communicated only for the purpose of administration or enforcement under the program. New subparagraph 241(4)(d)(xvi) extends this authority to communicate information to an official of the Canadian Radio-television and Telecommunications Commission, solely for the purpose of the administration or enforcement of a regulatory function of that Commission.

New subparagraphs 241(4)(d)(xv) and (xvi) apply on Royal Assent.

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 listed international agreement.

A "listed international agreement" is newly defined in subsection 248(1) to mean the Convention on Mutual Administrative Assistance in Tax Matters, concluded at Strasbourg on January 25, 1988 and the Convention between the Government of Canada and the Government of the United Mexican States for the Exchange of Information with Respect to Taxes, signed at Mexico City on March 16, 1990. 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.

This amendment applies on Royal Assent.

ITA
241(9)

New subsection 241(9) of the Act, which applies on Royal Assent, is added to provide authority to the Minister of Canadian Heritage to publish certain information relevant to the Canadian film or video production tax credit program. The information includes the title of a film or video production in respect of which a certificate has been issued or revoked by that Minister, as well as the names of producers and artists in respect of which that Minister has allotted "points" in determining whether the production is a "Canadian film or video production" under proposed section 1106 of the Regulations.

Clause 185

Interpretation

ITA
248

Section 248 of the Act defines a number of terms that apply for the purposes of the Act, and sets out various rules relating to the interpretation and application of various provisions of the Act.

Definitions

ITA
248(1)

"common-law partner"

An individual becomes the common-law partner of another individual once they have cohabited in a conjugal relationship for at least one year. Paragraph (a) of the definition "common-law partner" in subsection 248(1) is amended, effective for the 2001 and subsequent taxation years, to clarify that, for an individual to be considered the common-law partner of another person at a particular time, the individual and that other person need to have cohabited in a conjugal relationship throughout the twelve-month period that ends at that particular time.

"disposition"

The expression "disposition" is used throughout the Act, particularly in provisions relating to transactions involving property.

The definition "disposition" was added to subsection 248(1) by S.C. 2001, chapter 17, ss. 188(5) [formerly Bill C-22]. In general, that definition is applicable to transactions and events that occur after December 23, 1998. The former definition "disposition" was contained in section 54 of the Act, applicable to transactions and events that occurred before December 24, 1998.

Under the definition "disposition" in subsection 248(1), a "disposition" of any property includes a transaction or an event described in any of paragraphs (a) to (d) of that definition but does not include a transaction or an event described in any of paragraphs (e) to (m) of that definition.

Under subparagraph (b)(i) of that definition, a disposition of a property includes any transaction or event by which, where the property is a share, bond, debenture, note, certificate, mortgage, agreement of sale or similar property, or an interest in it, the property "is redeemed in whole or in part or is cancelled".

The definition "disposition" in subsection 248(1) is amended in the following ways.

First, subparagraph (b)(i) of the definition now provides that a disposition of property includes any transaction or event by which, where the property is a share, bond, debenture, note, certificate, mortgage, agreement of sale or similar property, or an interest in it, the property "is in whole or in part redeemed, acquired or cancelled". This amendment makes it clear that a disposition will also include a transaction or event by which the property is acquired.

Second, paragraph (n) is added to the definition. New paragraph (n) provides that a redemption, an acquisition or a cancellation of a share, or of a right to be issued a share, (which share or which right, as the case may be, is referred to as the "security") of the capital stock of a corporation (the "issuing corporation") held by another corporation (the "disposing corporation") is considered not to be a "disposition" in the case where

Both amendments apply to redemptions, acquisitions and cancellations that occur after December 23, 1998, and, where the redemption, acquisition or cancellation takes place before December 21, 2002, the Minister of National Revenue shall, notwithstanding subsections 152(4) to (5) of the Act, make any assessment of a taxpayer's tax, interest and penalties payable under the Act for any taxation years that include the time at which such a redemption, acquisition or cancellation occurred that is necessary to take into account the application of the amendments.

In connection with redemptions, acquisitions and cancellations that occur before December 24, 1998, see the commentary to new subsection 248(1.1) of the Act.

Third, the definition "disposition" in subsection 248(1) is also amended by restricting the circumstances in which a transfer of property between trusts will not be treated as a disposition. In particular, paragraph (f) of the definition is amended so that a transfer of property from a trust to another trust will avoid, under that paragraph, characterization as a disposition only if both trusts are, at the time of the transfer, resident in Canada.

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

"dividend rental arrangement"

A "dividend rental arrangement" is, in general terms, an arrangement under which one person receives a dividend on a share that has been borrowed from another person who retains the risk of loss or opportunity for gain from fluctuations in the share value. To clarify its application where a partnership is a party to the arrangement, the definition is restructured and amended; its language is also updated in certain respects.

Under the amended definition, the "person" who is the subject of the arrangement - that is, the person who enters into the arrangement in order to receive a dividend - may be a partnership or a person as otherwise defined.

Existing paragraph (c) of the definition ensures that the definition includes an arrangement under which a corporation receives a taxable dividend that would be deductible but for subsection 112(2.3) of the Act, and is obligated to make dividend compensation payments. This paragraph is replaced by new paragraph (b), which adds to the arrangements described one in which it is not the corporation receiving the dividend that is obligated to make the compensation payment, but rather a partnership of which the corporation is a member.

At first reading, new paragraph (b) may seem asymmetrical, in that it expressly covers the case where a partnership is obligated to make the compensation payment, but not the case where a partnership receives the taxable dividend. In fact, the paragraph covers both: since in the latter case the corporate partner is itself already considered to receive the dividend, it is not necessary to add a reference to the partnership in that regard.

The reference to "subsection 260(5)" in this definition is replaced with "subsection 260(5.1)" consequential to the amendments to section 260. This amendment applies to paragraph (d) of the former definition and clause (b)(ii)(B) of the amended definition.

The amendment to paragraph (d) of the former definition applies between January 1, 2002 and December 20, 2002 unless an election noted below is filed.

The amended definition applies to arrangements made after December 20, 2002; it also applies to an arrangement made after November 2, 1998 and before the day after December 20, 2002, if the parties jointly elect in writing filed with the Minister of National Revenue within 90 days after this Act has been assented to, except that before 2002 the reference to "subsection 260(5.1)" in the amended definition should be read as "subsection 260(5)".

"foreign resource property"

The definition "foreign resource property" in subsection 248(1) of the Act is structured to parallel the definition "Canadian resource property" in subsection 66(15) of the Act, with the necessary modifications to reflect the location of the property outside Canada. This definition is amended, effective for property acquired after December 20, 2002, as a consequence of changes to the definition "Canadian resource property".

"former business property"

The definition "former business property" in subsection 248(1) of the Act describes properties the voluntarily disposition of which by a taxpayer are eligible for elections under subsections 13(4) and 44(1) of the Act to defer the recapture of depreciation and capital gains. Subject to certain exceptions, a former business property is generally real property or an interest in real property used primarily in a business. The definition is amended, applicable after December 20, 2002, to include a franchise, concession or license for a limited period that is wholly attributable to the carrying on of a business in a fixed place and that is the subject of a valid election under new subsection 13(4.2) of the Act. For further information, refer to the commentary to new subsections 13(4.2) and (4.3).

"listed international agreement"

The definition of "listed international agreement" is added to subsection 248(1) as a consequence of the amendments to subsection 231.2(1) and subparagraph 241(4)(e)(xii). The agreements included in the definition are the Convention on Mutual Administrative Assistance in Tax Matters, concluded at Strasbourg on January 25, 1988 and the Convention between the Government of Canada and the Government of the United Mexican States for the Exchange of Information with Respect to Taxes, signed at Mexico City on March 16, 1990.

This amendment applies on Royal Assent.

"qualifying environmental trust"

The French version of the definition of "qualifying environmental trust", in subsection 248(1) of the Act, is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

"qualifying trust annuity"

The term "qualifying trust annuity" is added to subsection 248(1) of the Act, and is defined to have the meaning assigned by new subsection 60.011(2). A distinguishing feature of a qualifying trust annuity is that the annuitant is a trust. Special provisions relating to qualifying trust annuities are set out in sections 60.011, 75.2, 148 and 160.2 of the Act. (Refer to the explanatory notes on those provisions for further details.)

"scientific research and experimental development"

Paragraph (d) of the definition "scientific research and experimental development" in subsection 248(1) of the Act includes, for the purposes of applying that definition in respect of a taxpayer, certain work (listed therein) undertaken by or on behalf of a taxpayer if the work is commensurate with the needs, and directly in support, of work described in paragraphs (a) to (c) of that definition that is undertaken by or on behalf of the taxpayer. "Engineering" work is among the work listed in paragraph (d). The French version of paragraph (d) of the definition is changed, effective upon Royal Assent, to refer to "travaux de genie" instead of "travaux techniques".

"specified proportion"

The definition "specified proportion" of a member of a partnership for a fiscal period of the partnership is currently found in subsection 206(1) of the Act. The apportionment that results from the definition is, however, useful for many purposes of the Act, and a number of other provisions apply the same concept. For simplicity, the definition is moved to subsection 248(1) of the Act. As a result, for all purposes of the Act a partner’s specified proportion for the period is that proportion of the partnership's total income or loss for that period that is the member's share. If the partnership’s income or loss for the period is nil, the proportion is computed as if the partnership had $1 million of income for the period.

This amendment applies after December 20, 2002.

Non-Disposition Before December 24, 1998

ITA
248(1.1)

The definition "disposition" was added to subsection 248(1) of the Act by S.C. 2001, chapter 17, subsection 188(5) [formerly Bill C-22]. In general, that definition applies to transactions and events that occur after December 23, 1998. The former definition "disposition" was contained in section 54 of the Act, applicable to transactions and events that occurred before December 24, 1998.

New paragraph (n) is added to the definition "disposition" in subsection 248(1), applicable to redemptions, acquisitions and cancellations of certain securities that occur after December 23, 1998. For more detail, see the commentary to subsection 248(1).

New subsection 248(1.1) of the Act is added to deal, in a corresponding fashion, with such redemptions, acquisitions and cancellations that occurred before December 24, 1998.

New subsection 248(1.1) provides that a redemption, an acquisition or a cancellation, at any particular time after 1971 and before December 24, 1998, of a share or of a right to acquire a share (which share or which right, as the case may be, is referred to as the "security") of the capital stock of a corporation (referred to as the "issuing corporation") held by another corporation (referred to as the "disposing corporation") is not a disposition of the security within the meaning of the definition "disposition" in section 54 (as that section read in its application to transactions and events that occur at the particular time), if

New subsection 248(1.1) applies on Royal Assent and, notwithstanding subsections 152(4) to (5) of the Act, the Minister of National Revenue may make any assessment of a taxpayer's tax, interest and penalties payable under the Act for a taxation year that includes the time at which a redemption, acquisition or cancellation occurred that is necessary to take into account the application of new subsection 248(1.1) in respect of the redemption, acquisition or cancellation.

Bare Ownership - Gifts to Charity

ITA
248(3.1)

Under civil law, where a property is subject to dismemberment such as a usufruct or a right of use established in favour of an individual while another has the bare ownership, subsection 248(3) of the Act deems the property subject to such a usufruct or right of use to have been transferred to a trust. The whole property will thus be disposed of. Subsection 248(3), as it now reads, does not provide for any exception where the bare ownership of an immovable is gifted to a registered charity. New subsection 248(3.1) provides relief, similar to the exception found in subsection 43.1(1) of the Act for life interests created at common law, where the usufruct or right of use of an immovable is retained by a taxpayer but the bare ownership of the immovable is gifted in circumstances where the gift generates entitlement to a charitable donations credit.

Under new subsection 248(3.1) and subsection 69(1), the dismemberment will entail a disposition only of the bare ownership of an immovable for an amount equal to its fair market value (FMV). In the case of capital property, the adjusted cost base (ACB) of the property will be divided under subsection 43(1) of the Act pro rata between the bare ownership and usufruct or right of use. The usufruct or right of use will be considered to have been disposed of only when it is actually disposed of or is otherwise deemed to be disposed of by the taxpayer.

Example

Mrs. A, whose property is governed by the civil law of the province of Québec, owns as capital property an immovable worth $100,000, which has an ACB of $10,000. She creates a dismemberment of the property by giving the bare ownership (FMV of $60,000) to a registered charitable organization and retaining the right of use (FMV of $40,000).

Under the present rules, subsections 248(3) and 69(1) of the Act apply and Mrs. A is considered to have disposed of the immovable at its FMV ($100,000) in favour of a deemed trust. A gain of $90,000 is triggered ($100,000 - $10,000).

Because of new subsection 248(3.1) and subsection 69(1), there is a disposition only of the bare ownership for proceeds of disposition equal to its FMV, i.e. $60,000. This amount can be included in the calculation of her charitable gifts credit. The ACB attributable to the bare ownership is $6,000 ($10,000 X 6/10). This transaction will give rise to a gain of $54,000 ($60,000 - $6,000). Mrs. A retains the right of use of the immovable and there is no disposition of this right. At death, a deemed disposition of her right of use will occur at FMV (established in the same way as for a life estate and remainder interest).

Occurrences as a Consequence of Death

ITA
248(8)

The French version of subsection 248(8) of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Goods and Services Tax - Input Tax Credit and Rebate

ITA
248(16)

Subsection 248(16) of the Act provides rules under which amounts received by, or credited to, a taxpayer as an input tax credit or rebate with respect to the goods and services tax (GST) are deemed to be assistance from a government received by a taxpayer. As a consequence, such amounts are either included in income or reduce the cost or capital cost of the related property, or the amount of the related expenditure or expenditure pool, for tax purposes.

Subsection 248(16) also specifies the time at which the receipt (or credit) of an input tax credit or rebate is deemed to be received as assistance. With respect to input tax credits, subparagraph 248(16)(a)(i) provides that the assistance (i.e., the input tax credit) is considered to be received by a taxpayer at the time the GST in respect of the input tax credit was paid or became payable by the taxpayer if the GST was paid or became payable in the same reporting period under the Excise Tax Act in which the input tax credit was claimed. If a taxpayer does not claim the input tax credit in the same reporting period in which the GST was paid or became payable, subparagraph 248(16)(a)(ii) includes the amount of assistance in the taxpayer's income for the taxation year that includes the end of the reporting period in which the taxpayer claimed the input tax credit.

Subsection 248(16) is amended in three respects for input tax credits that become eligible to be claimed in taxation years that begin after December 20, 2002.

First, subparagraph 248(16)(a)(i) is amended to extend its application to cases where the input tax credit is claimed by a taxpayer in a reporting period that is subsequent to the period in which the related GST was paid or became payable if

In general, the change to this subparagraph means that an input tax credit of a taxpayer (who is a GST filer with a threshold amount greater than $500,000 for GST purposes) is considered to have been received at the time the related GST was paid or became payable, even though the input tax credit is claimed in a later GST reporting period. However, this is the case only if the taxpayer claims the input tax credit at least 120 days before the taxation year in which the GST was paid or became payable becomes statute-barred for income tax purposes.

Second, subparagraph 248(16)(a)(ii) is amended to provide that an input tax credit is considered to be received at the end of the reporting period in which it is claimed only if

Thus, subparagraph 248(16)(a)(ii) does not apply if subparagraph 248(16)(a)(i) applies. Where subparagraph 248(16)(a)(i) does not apply, subparagraph 248(16)(a)(ii) provides that the input tax credit is considered to have been received at the end of the reporting period in which it is claimed only if the taxpayer's threshold amount for GST purposes was $500,000 or less at the time the GST was paid or became payable.

Third, new subparagraph 248(16)(a)(iii) is added to apply in any other case. If applicable, that subparagraph provides that the input tax credit is considered to have been received on the last day of the taxpayer's earliest taxation year

Reference should also made to the commentary to new subsection 248(17.1) of the Income Tax Act which provides a special rule in respect of the timing of a claim in respect of certain input tax credits assessed under the Excise Tax Act.

Quebec Sales Tax - Input Tax Refund and Rebate

ITA
248(16.1)

New subsection 248(16.1) of the Act provides special rules for amounts received, or credited to, a taxpayer as an input tax refund or rebate in respect of Quebec sales tax. Such amounts are either included in a taxpayer's income or reduce the cost or capital cost of the related property, or the amount of the related expenditure or expenditure pool, for tax purposes.

In general, an input tax refund in respect of Quebec sales tax may - depending on the circumstances - have to be included in a taxpayer's income in the taxation year in which the taxpayer may first claim the refund, rather than the year in which it is received. A rebate of Quebec sales tax is included in income at the time the rebate is received or credited. For a more detailed explanation of the application of subsection 248(16.1), reference should be made to the commentary accompanying amendments to subsection 248(16), which provides analogous special rules in respect of the timing of the inclusion in income of certain input tax credits and rebates assessed under the Excise Tax Act.

Subsection 248(16.1) applies in respect of Quebec input tax refunds and rebates that become eligible to be claimed in taxation years that begin after February 27, 2004.

Application of Subsection (16) to Passenger Vehicles and Aircraft

ITA
248(17)

Subsection 248(17) of the Act applies in the case of an input tax credit in respect of a passenger vehicle or aircraft claimable by an individual or partnership where the credit is determined by reference to capital cost allowance in respect of the vehicle or aircraft (i.e., where there is less than exclusive use in commercial activity). Subsection 248(17) is amended to reflect the amendments made to subsection 248(16) as described in the commentary to that subsection.

The amendments to subsection 248(17) apply in respect of input tax credits that become eligible to be claimed in taxation years that begin after December 20, 2002.

Application of Subsection (16.1) to Passenger Vehicles and Aircraft

ITA
248(17.1)

New subsection 248(17.1) of the Act applies in the case of an input tax refund of Quebec sales tax, in respect of a passenger vehicle or aircraft, claimable by an individual or partnership where the credit is determinable by reference to capital cost allowance in respect of the vehicle or aircraft (that is, where there is less than exclusive use in commercial activity). In general, this subsection defers the time the input tax refund is considered to be received for income tax purposes to the taxation year or fiscal period following that in which Quebec sales tax in respect of the property is considered as payable for the purposes of determining the input tax refund. This avoids circularity with subsection 248(16.1). The provision preserves the proper timing between the input tax refund entitlement and the adjustment to the capital cost. This change applies in respect of Quebec input tax refunds that become eligible to be claimed in taxation years that begin after February 27, 2004.

Input Tax Credit on Assessment

ITA
248(17.2)

New subsection 248(17.2) of the Act determines, in respect of input tax credits that become eligible to be claimed in taxation years that begin after December 20, 2002, the time at which an input tax credit is considered to have been claimed in respect of certain input tax credit assessments made under the Excise Tax Act (ETA).

This subsection provides that, if an amount in respect of an input tax credit is deemed by subsection 296(5) of the ETA to have been claimed in a return or application filed under Part IX of that Act, the input tax credit is deemed to have been claimed for the GST reporting period that includes the time the Minister of National Revenue makes the GST assessment.

Accordingly, the rule in clause 248(16)(a)(i)(A) of the Income Tax Act (ITA) relating to the time at which an input tax credit is considered to have been received cannot apply to an input tax credit to which subsection 296(5) of the ETA applies. However, the other rules in paragraph 248(16)(a) of the ITA that determine the time at which an input tax credit is received are to be applied on the basis that an input tax credit (to which subsection 296(5) of the ETA applies) is not claimed by the taxpayer until the reporting period that includes the time at which the input tax credit is actually assessed - i.e., not the reporting period to which the assessment relates but the reporting period in which the input tax credit is deemed to be claimed for GST purposes.

Quebec Input Tax Credit on Assessment

ITA
248(17.3)

New subsection 248(17.3) of the Act provides that an input tax refund of Quebec sales tax, that is deemed to be claimed by section 30.5 of An Act respecting the Quebec Revenue Minister, is deemed to be claimed for the reporting period under An Act respecting Quebec Sales Tax that includes the day on which an assessment is issued to the taxpayer indicating that the refund has been allocated to the taxpayer. This change applies in respect of Quebec input tax refunds and rebates that become eligible to be claimed in taxation years that begin after February 27, 2004.

Repayment of Quebec Input Tax Refund

ITA
248(18.1)

New subsection 248(18.1) of the Act provides that an amount added in determining net tax of a taxpayer under An Act respecting Quebec Sales Tax in respect of an input tax refund relating to a property or service that had previously been deducted in computing such net tax is treated as assistance repaid under a legal obligation to repay that assistance. Such an amount could be so added under Quebec law pursuant to an assessment of Quebec sales tax. As a consequence, such an amount will either be deducted in computing income under paragraph 20(1)(hh) or will increase the cost or capital cost of the related property or the amount of the related expenditure or expenditure pool for tax purposes (as provided under subsection 13(7.1), paragraphs 37(1)(c) and 53(2)(k) and under the definitions "cumulative Canadian exploration expense" in subsection 66.1(6), "cumulative Canadian development expense" in subsection 66.2(5) and "cumulative Canadian oil and gas property expense" in subsection 66.4(5)). This change applies after February 27, 2004.

Trust-to-trust Transfers

ITA
248(25.1)

Subsection 248(25.1) of the Act applies where there is a transfer of a property from a particular trust to another trust (other than a RRSP trust or RRIF trust) in circumstances to which paragraph (f) of the definition "disposition" in subsection 248(1) (see the commentary above) applies. The result of the application of paragraph (f) is that the transfer does not constitute a disposition. Where this is the case, subsection 248(25.1) deems the other trust after the particular time to be the same trust as, and a continuation of, the particular trust.

Subsection 248(25.1) is amended, for greater certainty, to ensure that where the transferred property is deemed under a number of specified provisions to be taxable Canadian property of the particular trust, the property continues to be taxable Canadian property of the other trust.

This amendment applies in respect of transfers that occur after December 23, 1998.

Cost of Trust Interest

ITA
248(25.3)

Subsection 248(25.3) of the Income Tax Act applies where a trust (other than a personal trust or a trust prescribed for the purpose of subsection 107(2) of the Act) issues particular units of the trust to a taxpayer directly in satisfaction of a right to a qualifying amount payable from the trust in respect of the taxpayer's capital interest in the trust. In such a case, the cost to the taxpayer of the particular units is deemed to equal the amount so payable. Subparagraph 248(25.3)(c)(i) provides that in the case of particular units of a trust that are capital property, a qualifying amount payable is one that causes, or but for clauses 53(2)(h)(i.1)(A) and (B) would cause, a reduction under subparagraph 53(2)(h)(i.1) of the Act to the adjusted cost base of the taxpayer's capital interest in the trust.

Subparagraph 248(25.3)(c)(i) is amended to provide that, in the case of particular units of a trust that are capital property, a qualifying amount payable is an amount payable that does not represent proceeds of disposition of a capital interest in the trust.

This amendment applies to trust units issuedafter December 20, 2002.

Gifts and Contributions

ITA
248(30) to (41)

At common law, it is generally the view that a gift includes only a property transferred voluntarily, without any contractual obligation and with no advantage of a material character returned to the transferor.

In contrast, under section 1806 of the Civil Code of Quebec ("CCQ"), a gift in Quebec is a contract by which ownership of property is transferred by gratuitous title. However, the rights of ownership may be separated, such that it may be possible for a transferor to transfer part of the rights of ownership without any material advantage returned (i.e., by way of gift) and to transfer the other part separately for consideration. It is therefore possible, in Quebec, to sell a property to a charity at a price below fair market value, resulting in a gift of the difference.

Under both the common law and the CCQ, it is generally accepted that a transfer of property is not a gift unless the donor is impoverished by the transfer to the benefit of the donee and it is the donor's intention to enrich the donee without consideration.

At common law there is generally no ability to separate the rights of ownership of a single property in the course of making a gift. As such, at common law a contract to dispose of a property to a charity at a price below fair market value would not generally be considered to include a gift.

Nevertheless, there have been certain decisions made under the common law where it has been found that a transfer of property to a charity was made partly in consideration for services and partly as a gift.

Subsections 248(30), (31) and (32) are added to the Act to clarify the circumstances under which taxpayers and donees may be eligible for tax benefits available under the Act in respect of the impoverishment of a taxpayer in favour of a donee. In addition to the clarification provided by these new rules, on December 24, 2002, the Canada Customs and Revenue Agency released guidelines (Income Tax Technical News No. 26)that describe how it will apply the new rules to various situations and fundraising methods commonly used in the charitable sector. Subsection 248(34) provides technical rules regarding the repayment of debt that previously reduced the eligible amount of a gift. Subsections 248(35) to (39) provide technical rules, regarding the eligible amount of a gift or the value of property transferred and benefits receivable, that apply in calculating the eligible amount of a gift or political contribution. New subsection (40) requires a qualified donee to inquire of a donor as to the existence of certain information that the donee would require in order to determine the eligible amount to report on a receipt, if the value of the gift exceeds $5,000. New subsection (41) deems the eligible amount of a gift to be nil if a donor fails to provide that information.

In general, these provisions are intended to reflect the policy that the amount eligible for an income tax benefit to a donor, by way of a charitable donation deduction or credit or a political contributions tax credit, should reflect the economic impact on the donor (before considering the income tax benefit) of the gift or contribution.

Intention to Give

ITA
248(30)

For the transfer of property to qualify as a gift, it is necessary that the transfer be voluntary and with the intention to make a gift. At common law, where the transferor of the property has received any form of consideration or benefit, it is generally presumed that such an intention is not present. New subsection 248(30) of the Act, which applies in respect of transfers of property after December 20, 2002 to qualified donees (such as registered charities), allows the opportunity to rebut this presumption. New paragraph 248(30)(a) provides that the existence of an amount of an advantage to the transferor will not necessarily disqualify the transfer from being a gift if the amount of the advantage does not exceed 80% of the fair market value of the transferred property.

Example

Mr. Short transfers land and a building with a fair market value of $300,000 to a registered charity. The charity assumes liability for an outstanding $100,000 mortgage on the property. The assumption of the mortgage by the charity does not necessarily disqualify the transfer from being a gift for the purposes of the Act.

If the value of the mortgage is equal to the outstanding amount (e.g., the interest rate and terms and conditions are representative of current market conditions), the eligible amount of the gift, in respect of which Mr. Short may be entitled to a tax credit under subsection 118.1(3), is $200,000.

If the amount of an advantage in respect of a transfer of property exceeds 80% of the fair market value of the transferred property, new paragraph 248(30)(b) provides that the transfer will not necessarily be disqualified from being a gift if the transferor can establish to the satisfaction of the Minister of National Revenue that the transfer was made with the intention to make a gift.

In the above example, if the amount of the mortgage outstanding had been greater than $240,000, Mr. Short (or the charity on Mr. Short's behalf) could apply to the Minister of National Revenue for a determination as to whether the transfer was made with the intention to make a gift.

It is generally accepted that the tax benefit available to a taxpayer, by way of a charitable donation deduction or credit, is not considered an advantage or benefit that would reflect a lack of donative intent on the part of a taxpayer. However, there may be circumstances where the intention of a taxpayer to make a gift is in doubt because of the combination of tax and other benefits to the taxpayer. If the primary motivation of a taxpayer for entering into a transaction or series of transactions is to return a profit to the taxpayer by way of a combination of tax and other benefits, the taxpayer may not be impoverished by the transfer of a property to a charity. Subsection 248(30) is not intended to allow a taxpayer to profit by the making of a gift.

Eligible Amount of Gift or Monetary Contribution

ITA
248(31)

New subsection 248(31) of the Act, which applies in respect of gifts and political contributions made after December 20, 2002, defines the eligible amount of a gift or contribution as the amount by which the fair market value of the property that is the subject of the gift or contribution exceeds the amount of the advantage, if any, in respect of the gift or contribution. Subsection 248(31) is added concurrently with amendments to subsections 110.1(1) and 118.1(1) of the Act, which describe the types of gifts in respect of which an eligible amount will qualify for a deduction (for corporations) or a tax credit (for individuals). The amount of the advantage in respect of a gift or contribution is described in new subsection 248(32) of the Act.

It is proposed that subsections 3501(1), (1.1) and (6) of the Regulationsbe amended to provide that official receipts issued by a registered organization in respect of a gift made after December 20, 2002 contain, in addition to the information already prescribed, the eligible amount of the gift.

Amount of Advantage

ITA
248(32)

New subsection 248(32), which generally applies in respect of gifts or political contributions made after December 20, 2002, describes the amount of an advantage in respect of a gift or contribution as, in general, the total value of all property, services, compensation or other benefits to which the donor of a property is entitled.

Subsection 248(32) is added concurrently with the addition of subsection 248(31) of the Act, which defines the eligible amount of a gift or contribution, and with the amendment of subsection 127(3) of the Act in respect of contributions to a political party. The amount of an advantage reduces the eligible amount of a gift or contribution.

In general, new subsection 248(32) is intended to apply in respect of any transaction or series of transactions having either the purpose or the effect of reducing the economic impact to a donor of a gift or contribution. This includes, for instance, situations where a charity invests funds or acquires property in a manner that benefits the donor. The reduction to an eligible amount also includes an advantage that is partial consideration for, or in gratitude for, the gift or contribution, or is in any way related to the gift or contribution. An example would include the option of a donor to satisfy or pay a loan by assigning or transferring to another person a property (including the rights under an insurance policy) that has less economic value than the amount of loan outstanding. Another example would include an assumption of a donor's risk by a charity, where the acquisition, directly or indirectly, of an interest in a property of the donor by the charity may have the effect of reducing the potential loss of the donor from that investment. (However, a tax credit or deduction resulting from a charitable donation is not considered a benefit.)

An advantage may exist even though it is not received at the time of the gift or contribution. For example, it may have been received prior to the time of the gift or may be contingent or receivable in the future. The advantage may accrue either to the donor or to a person not dealing at arm's length with the donor. It is not necessary that the advantage be receivable from the donee.

Paragraph 248(32)(b) includes as an advantage any limited-recourse debt in respect of the gift or contribution. For additional details regarding limited-recourse debt, see the commentary to new subsection 143.2(6.1) of the Act.

It is proposed that subsections 2000(1) and (6) and 3501(1), (1.1) and (6) of the Regulationsbe amended to provide that official receipts issued by a registered organization or political party in respect of a gift or contribution contain, in addition to the information already prescribed, the eligible amount and the amount of the advantage, if any, in respect of the gift or contribution.

Cost of Property Acquired by Donor

ITA
248(33)

New subsection 248(33) of the Act, which applies in respect of gifts or political contributions made after December 20, 2002, provides that the cost to a taxpayer of property acquired by the taxpayer in the course of the making of a gift or contribution by the taxpayer is the fair market value of the property at the time of the making of the gift or contribution. The fair market value of such a property is relevant in computing the amount of the advantage in respect of the gift or contribution under subsection 248(32).

Repayment of Limited Recourse Debt

ITA
248(34)

New subsection 248(34) of the Act, which applies in respect of gifts or political contributions made after February 18, 2003, generally provides that a repayment of the principal amount of a limited-recourse debt in respect of a gift or political contribution is deemed to be a gift in the year it is paid. However, in some circumstances the total amount of limited-recourse debt and other advantages to the donor may exceed the fair market value of the property transferred to a charity, resulting in no eligible amount to the donor under subsection 248(31) of the Act. In this case, the donor must pay off the excess amount before any amount will be allowed as a gift. Also, a payment financed by other limited-recourse debt or made by way of assignment or transfer of a guarantee, security or similar indemnity or covenant is not recognized for these purposes. For example, the assumption of a taxpayer's limited-recourse debt by another person, in exchange for an insurance policy in favour of the taxpayer that guarantees a particular rate of return on an investment held by any person, would not qualify as a deemed gift under subsection 248(34).

Deemed Fair Market Value

ITA
248(35)

New subsection 248(35) of the Act, which applies in respect of gifts made after 6:00 p.m. (EST), December 5, 2003, provides that the fair market value of a property that is the subject of a gift is, for the purposes of determining the eligible amount of a gift under subsection 248(31), deemed to be the lesser of the actual fair market value of the property and its cost to the donor. This rule applies if the property was acquired by the donor as part of a gifting arrangement that is a tax shelter. For more information on gifting arrangements, refer to the commentary for subsection 237.1(1) of the Act.

Unless the donation is made as a consequence of the donor’s death, this rule also applies if the property was acquired

Non-arm’s Length Transactions

ITA
248(36)

New subsection 248(36) of the Act applies in conjunction with subsection 248(35), to "look-back" to discern whether a donated property was previously acquired by a person dealing non-arm’s length with the donor. If subsection 248(35) applies because the donor acquired the property within the three years of donation, then if a non-arm’s length person owned that property within that three-year period, the value of the gift to the donor will be the lower of the taxpayer’s cost and the lowest cost to any such non-arm’s length person.

Similarly, the rule will apply if subsection (35) applies because the taxpayer acquired the property within the last ten years and one of the main reasons of the acquisition was to gift the property, if a non-arm’s length person acquired that property within that ten-year period.

Subsection 248(36) applies to gifts made on or after ANNOUNCEMENT DATE.

Non-application of Subsection (35)

ITA
248(37)

New subsection 248(37) of the Act provides exceptions to the application of subsection 248(35) of the Act where the property that is the subject of a gift is an ecological gift, inventory, real property situated in Canada, publicly-traded securities or cultural property, the value of which is certified by the Cultural Property Export Review Board.

In some circumstances, a shareholder might transfer a property to a controlled corporation in exchange for shares issued by the corporation, and then donate the shares. Alternatively, the corporation might donate the property it received. If subsection 248(35) would not have applied to a gift of a property by a shareholder, either because it is a type of property referred to above or because subsection 248(35) would not apply to the shareholder in any event, and if the shareholder donates the share, subsection 248(37) will further exempt the share from the application of subsection 248(35). If subsections 85(1) or 85(2) of the Act applied to the transfer of such an exempt property to the corporation, then subsection 248(37) will preclude the application of subsection 248(35) to that property if it is then donated by the corporation.

Artificial Transactions

ITA
248(38)

New subsection 248(38) of the Act applies in respect of gifts made after 6:00 p.m. (EST), December 5, 2003, to prevent a donor from avoiding the application of subsection 248(35) by disposing and reacquiring a property before donating it to a qualified donee. If this is the purpose of any transaction or series of transactions that includes a disposition or acquisition of a property, for such gifts made before ANNOUNCEMENT DATE, the cost of the property to the donor for the purpose of subsection 248(35) is deemed to be the lowest cost incurred by the taxpayer at any time to acquire that property or an identical property.

For gifts made on or after ANNOUNCEMENT DATE, the eligible amount is deemed to be nil if a transaction or series of transactions

For example, the eligible amount of a gift resulting from a transaction or series to which subsection 248(38) would apply, if the gift were made before ANNOUNCEMENT DATE, would be deemed to be nil if instead the gift were made on or on or after ANNOUNCEMENT DATE.

The objectives of the provisions in the Act related to gifting are generally described above under the heading "Gifts and Contributions", but are not limited to that description.

Substantive Gift

ITA
248(39)

New subsection 248(39) of the Act, which applies in respect of gifts made after February 26, 2004, prevents a donor from avoiding the application of subsection 248(35) by disposing a property (the "substantive gift") to a qualified donee and donating the proceeds, rather than donating the property itself. The provision applies similarly in respect of political contributions. The fair market value of the gift or contribution of the proceeds, for the purpose of determining its eligible amount under subsection 248(31), is deemed to be the lesser of the fair market value of the property sold and its cost. Subsection 248(39) does not apply if subsection 248(35) would not have applied to a gift by the taxpayer of that property.

Reasonable Inquiry

ITA
248(40)

New subsection 248(40) of the Act, which applies in respect of gifts and monetary contributions made after 2005, requires a person issuing a receipt for tax purposes, with a stated eligible amount in excess of $5,000, to inquire as to whether certain circumstances exist that would result in an eligible amount being reported on the receipt that is less than the fair market value of the property (determined without reference to the Act). In particular, such information would include that relevant to the application of subsections 248(31), (35), (36), (38) or (39) of the Act. This would include, for example

However, a donee need not enquire as to whether the donor will be electing under subsection 110.1(3) or 118.1(6) to reduce amount reported as the fair market value of the gift.

For more information, refer to the commentary for subsections 110.1(3), 118.1(6), 143.2(6.1) and 248(31), (35), (36), (38) and (39).

Information Not Provided

ITA
248(41)

New subsection 248(41) of the Act, which applies in respect of gifts and monetary contributions made after 2005, provides that the eligible amount of a gift is nil if, before an official charitable receipt receipt is issued by a donee, the donor fails to inform the donee of information that would be relevant to the application of subsections 248(31), (35), (36), (38) or (39) of the Act. The donee requires such information for correct the preparation of the receipt. For more information, refer to the commentary for those provisions and subsection 248(40).

Clause 186

Taxation Year

ITA
249(1) and (1.1)

Subsection 249(1) of the Act sets out, for purposes of the Act, the definition "taxation year". Paragraph 249(1)(a) provides that in the case of a corporation, a taxation year is a fiscal period. Paragraph 249(1)(b) provides that the taxation year of an individual is the calendar year. Subsection 249(1) also provides that when a taxation year is referred to by reference to a calendar year, the reference is to the taxation year or years coinciding with, or ending in, that year.

Subsection 249(1) is amended to clarify that the definition "taxation year" contained in that subsection applies for purposes of the Act except as otherwise provided. For examples of exceptions, which apply for limited purposes, see the definitions "taxation year" in subsections 95(1) and 149.1(1).

Subsection 249(1) is also amended to add new paragraph 249(1)(c), which provides that the taxation year of a testamentary trust is the period for which the accounts of the trust are made up for purposes of assessment under the Act. This definition was previously contained in paragraph 104(23)(a), which is being repealed.

New subsection 249(1.1) of the Act provides that, when a taxation year is referred to by reference to a calendar year, the reference is to the taxation year or taxation years that coincide with, or that end in, that calendar year. This rule combines the identical rules previously found in paragraph 104(23)(b), which is repealed, and subsection 249(1).

These amendments apply after December 20, 2002. For a related set of amendments, see the commentary on paragraphs 104(23)(a) and (b).

Testamentary Trusts

ITA
249(5)

New subsection 249(5) of the Act is added consequential on the repeal of paragraph 104(23)(a) of the Act.

Subsection 249(5) provides that the period for which the accounts of a testamentary trust are made up for purposes of assessment under the Act may not exceed 12 months and that no change in the time when such a period ends may be made for the purposes of the Act without the concurrence of the Minister of National Revenue. The rule was previously found in paragraph 104(23)(a) of the Act, which is being repealed.

This amendment applies after December 20, 2002. For a related set of amendments, see the commentary on paragraphs 104(23)(a) and (b) and subsection 249(1) and (1.1).

Loss of Testamentary Trust Status

ITA
249(6)

New subsection 249(6) of the Act provides a set of rules that apply where a trust or estate loses its status under the Act as a "testamentary trust". This loss of status will generally occur where property has been contributed or loaned to the trust or estate in circumstances described in any of paragraphs (b) to (d) of the definition "testamentary trust" in subsection 108(1) or where the trust or estate has been created by someone other than the deceased person on and as a consequence of whose death the trust or estate arose (in this regard, see paragraph (a) of that definition). Under the existing rules in the Act, where a transaction or event described in any of those paragraphs occurs at a particular time, the trust or estate will lose its status as a testamentary trust for its entire taxation year that would otherwise include that time. As a result, the trust will be treated as an inter vivos trust at all times after the end of its last taxation year, if any, throughout which it was a testamentary trust. As such, its first taxation year after that last taxation year will be, given the definition "taxation year" in subsection 249(1), the calendar year.

New subsection 249(6) provides transitional relief for trusts or estates that lose their "testamentary trust" status. Under that subsection, if at a particular time after December 20, 2002 a transaction or event, described in any of paragraphs (b) to (d) of the definition "testamentary trust" in subsection 108(1), occurs and as a result of that occurrence a trust or estate is not a testamentary trust, a number of special rules apply in determining its taxation years and fiscal periods. (Note that a trust or estate that fails to qualify as a testamentary trust because of paragraph (a) of the definition "testamentary trust" will be an inter vivos trust from its creation and is, therefore, not in need of this transitional relief.) In particular,

New subsection 249(6) of the Act applies after ANNOUNCEMENT DATE. However, if a trust or estate elects inwriting filed with the Minister of National Revenue on or before its filing-due date for its taxation year in which the subsection receives Royal Assent, it also applies to that trust or estate, as the case may be, after December 20, 2002.

Example:

Trust A was created on and as a consequence of the death of John Smith in 2004. Trust A has a November 30 year-end. For its 2004 and 2005 taxation years, Trust A is a testamentary trust. On April 15, 2006, Trust A becomes indebted to a beneficiary of the trust by way of an interest-free loan.

Results:

(i) Existing scheme of the Act

Because of paragraph (d) of the definition "testamentary trust", Trust A cannot qualify as a testamentary trust at any time in its taxation year that began December 1, 2005. Therefore, Trust A becomes an inter vivos trust effective December 1, 2005. Trust A would, as an inter vivos trust, have a December 31, 2005 year-end, with an April 1, 2006 filing-due date.

(ii) New Subsection 249(6)

Because of paragraph (d) of the definition "testamentary trust", Trust A cannot qualify as a testamentary trust. Its taxation year that began December 1, 2005 is deemed to have ended immediately before April 15, 2006 – that is to say, on April 14, 2006 (Assume that a reference to time in the legislation is to a day.) Therefore, Trust A maintains its status as a testamentary trust throughout the stub year that began on December 1, 2005 and ended on April 14, 2006. The trust would have 90 days from the end of that taxation year to file its return of income for the stub year. A new taxation year is deemed to begin April 15, 2006. As the April 15, 2006 loan occurs in the new taxation year, Trust A is an inter vivos trust throughout the new taxation year, which, accordingly, will end on December 31, 2006. As a result, Trust A is able to maintain testamentary trust status until the time immediately before the offside event. With respect to any late-filing for the stub year, relief may be available under the provisions in section 220 of the Act.

Clause 187

Arm’s Length

ITA
251(1)

Subsection 251(1) of the Act provides a set of rules that determine whether persons are considered, for the purposes of the Act, to deal with each other at arm's length. Paragraph 251(1)(a) deems related persons not to deal with each other at arm’s length. Paragraph 251(1)(b) deems a taxpayer and a personal trust (other than a trust described in any of paragraphs (a) to (e.1) of the definition "trust" in subsection 108(1) of the Act) not to deal with each other at arm's length if the taxpayer, or any person not dealing at arm's length with the taxpayer, is beneficially interested in the trust. Paragraph 251(1)(c) provides that, where paragraph 251(1)(b) does not apply, it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm's length.

Paragraph 251(1)(c) is amended to clarify that it applies in any case where paragraphs (a) and (b) do not apply.

This amendment applies after December 23, 1998.

Clause 188

Extended Meaning of "spouse" and "former spouse"

ITA
252(3)

Subsection 252(3) of the Act extends the meaning of the terms "spouse" and "former spouse" to include, for a number of purposes, a party to a void or voidable marriage.

The provision is amended consequential on amendments to Part XII.2 of the Act, which add a new reference to "spouse" in the definition "designated income" and maintain the existing references to "spouse" and "former spouse" in the definition "designated beneficiary" in subsection 210(1) of the Act. For more detail, see the commentary on subsection 210(1).

This amendment generally applies to the 1996 and subsequent taxation years.

Clause 189

Investments in Limited Partnerships

ITA
253.1

Section 253.1 of the Act applies for specified provisions of the Act and Regulations where a trust or corporation holds an interest as a limited partner in a limited partnership. It provides that the trust or corporation will not, solely because of its acquisition and holding of the limited partnership interest, be considered to carry on any business or other activity of the partnership.

Section 253.1 is amended so that it also applies for the purpose of paragraph 146.1(2.1)(c) of the Act, which provides that the registration of a registered education savings plan (RESP) is revocable if a trust governed by the plan carries on a business. The amendment to section 253.1 ensures that the acquisition and holding of a limited partnership interest by an RESP trust does not jeopardize the registered status of the plan, provided the interest is a qualified investment for the trust.

This amendment generally applies after 1997.

Clause 190

Acquisition of Control of a Corporation

ITA
256

Section 256 of the Act provides rules for determining whether corporations are to be considered to be associated and whether control of a corporation has been acquired for the purposes of the Act.

Control in Fact

ITA
256(6)

Subsection 256(6) of the Act treats a controlled corporation as not being controlled by a person or partnership if certain conditions are met.

The French version of subparagraph 256(6)(b)(ii) is amended to replace an erroneous reference to the « entité dominante » (controller) by a reference to the « société contrôlée » (controlled corporation), which is what was intended.

This amendment applies on Royal Assent.

Acquiring Control

ITA
256(7)

Subsection 256(7) of the Act describes circumstances in which control of a corporation will be deemed to have been acquired (or not to have been acquired) for specific provisions of the Act.

ITA
256(7)(a)

Paragraph 256(7)(a) of the Act describes the circumstances where control of a corporation (or a corporation controlled by the corporation) is considered not to have been acquired for the purposes of certain provisions of the Act. That paragraph is amended in two ways.

First, subparagraph 256(7)(a)(i) is amended effective with respect to the acquisition of shares after 2000 to add clause (E) which precludes an acquisition of control of a corporation on a distribution (within the meaning assigned by subsection 55(1) of the Act) by a specified corporation (within the meaning assigned by that subsection) if a dividend is received in the course of a spin-off distribution in which no portion of the dividend is treated as a capital gain by the anti-avoidance rule in subsection 55(2) of the Act because of the application of the exception for certain reorganizations under paragraph 55(3)(b) of the Act.

Example:

Facts:

Pubco is a specified corporation under the butterfly rules in section 55 and a person or group of persons does not control it. Pubco owns all of the shares of Subco. In the course of a distribution (as defined by subsection 55(1)), Pubco distributes the Subco shares to Newco, which is established in the course of the reorganization for the purposes of the distribution. The same shareholders that own all of the shares of Pubco own all of the shares of Newco. Because there is no person or group of persons that control Pubco and Newco, an acquisition of control of Subco would occur upon Newco's acquisition of the Subco shares on the distribution despite the fact the same shareholders own Pubco and Newco.

Application:

In this example, new clause 256(7)(a)(i)(E) provides that there is no acquisition of control of Subco by Newco if Pubco's distribution of its Subco shares to Newco is a distribution to which the anti-avoidance rule in subsection 55(2) does not apply because the distribution complies with the exception in paragraph 55(3)(b).

Second, new subparagraph 256(7)(a)(iii), which applies to the acquisition of shares after 2000, provides that, where there is an acquisition of any shares of a corporation, there is no acquisition of control of the corporation by a related group of persons if each member of each group of persons that controls the corporation was related to the corporation immediately before the change of control.

Example:

Facts:

Corporation X has issued 100 common shares with 1 vote per share. There are no other issued shares. Mr. X owns 51% of Corporation X's issued shares. Ms. D who is the daughter of Mr. X owns 49% of the common shares issued by Corporation X. Mr. X has de jure control of Corporation X.

Mr. X disposes of 10 shares of Corporation X to Mr. Z, an arm's length person. Consequently, Mr. X no longer has de jure control, and a group of persons acquires de jure control of Corporation X.

Application:

If Mr. X and Ms. D form a related group of persons that otherwise acquires control of Corporation X upon the disposition of shares by Mr. X, new subparagraph 256(7)(a)(iii) deems no acquisition of control if no other group of persons that includes Mr. Z acquires control of Corporation X. It is a question of fact whether Mr. X and Ms. D form a group of persons that would otherwise acquire control of Corporation X and, if so, whether there exists another group of persons that also acquires control. Depending on the circumstances, Mr. X and Ms. D; Mr. X and Mr. Z; Ms. D and Mr. Z; or Mr. X, Ms. D and Mr. Z could form a group of persons that acquires control of Corporation X. Consequently, new subparagraph 256(7)(a)(iii) applies only if, in this example, Mr. X and Ms. D form a group of persons that control Corporation X and there exists no other group of persons (which includes Mr. Z) that acquires control of Corporation X.

ITA
256(7)(e)

Paragraph 256(7)(e) of the Act provides that, where certain conditions are satisfied, control of a particular corporation will be considered not to have been acquired solely because of a disposition of all of the shares of the particular corporation for consideration consisting solely of shares of the acquiring corporation. These conditions include a requirement that, immediately after the disposition, the acquiring corporation is not controlled by a person or group of persons and that the fair market value of the shares of the particular corporation is not less than 95% of the fair market value of all of the assets of the acquiring corporation.

Paragraph 256(7)(e) is amended, for shares acquired after 1999, to ensure that it applies on the acquisition of any shares of the capital stock of the particular corporation by the acquiring corporation if, immediately after the acquisition, the acquiring corporation owns all of the shares of the capital stock of the particular corporation (other than shares of a specified class) and the 95% test is met. This provision is also amended to deem control not to be acquired if shares of the particular corporation are acquired as part of a plan of arrangement and, upon completion of the arrangement, the acquiring corporation owns all the shares of the capital stock of the particular corporation (other than shares of a specified class) and the 95% test is met. Thus, amended paragraph 256(7)(e) may apply in circumstances where the acquiring corporation owns shares of the capital stock of the particular corporation before the acquisition being examined. In addition, amended paragraph 256(7)(e) excludes shares of a specified class, as defined in paragraph 88(1)(c.8) of the Act, from the determination of whether the acquiring corporation has acquired all of the shares of the particular corporation. Shares of a specified class are excluded on the basis that they are non-voting securities similar to debt and should not be considered indetermining whether control has been acquired for the purpose ofparagraph 256(7)(e).

This amendment also ensures that, in circumstances where the acquisition occurs as part of a plan of arrangement, the acquiring corporation includes a new corporation formed on an amalgamation of the acquiring corporation and a subsidiary controlled corporation of the acquiring corporation. As a result, paragraph 256(7)(e) may apply to a situation where the acquiring corporation owns shares of the particular corporation indirectly through a subsidiary controlled corporation if the acquiring corporation and the subsidiary controlled corporation are amalgamated as part of a plan of arrangement that includes the acquisition.

Clause 191

Proportional Holdings in Properties

ITA
259(1)

Subsection 259(1) of the Act provides a "look-through" rule that applies to certain taxpayers (including trusts governed by RRSPs) that acquire units of a "qualified trust". If the qualified trust so elects, each taxpayer is deemed to acquire, hold and dispose of its proportionate interest in the underlying assets of the qualified trust. This rule can benefit a taxpayer where the direct investment in the units of the qualified trust would constitute a non-qualified investment. By "looking through" to the underlying assets of the qualified trust, a taxpayer may be able to reduce or eliminate the tax penalties that result from holding non-qualified investments.

Subsection 259(1) is amended so that it applies for the purpose of the registration rules for registered education savings plans (RESPs). Under subsection 146.1(2.1), the registration of an RESP is revocable if a trust governed by the plan holds a non-qualified investment. This amendment will permit an RESP trust to make a direct investment in a qualified trust that is itself a non-qualified investment, without jeopardizing the registered status of the RESP, provided the qualified trust restricts its holdings to qualified investments.

This amendment applies to the 2000 and subsequent taxation years.

Clause 192

Securities Lending Arrangements

ITA
260

Section 260 of the Act sets out special rules that apply to securities lending arrangements.

Definitions

ITA
260(1)

Subsection 260(1) of the Act provides definitions that apply for the purposes of the special rules for securities lending arrangements. The existing definitions are modified, and additional definitions are added, as follows:

"dealer compensation payment"

"Dealer compensation payment" is one of the newly-defined terms, introduced not to effect any substantive change to the relevant rules but only for simplicity and clarity. A dealer compensation payment is an amount paid or received as compensation for an underlying payment by a registered securities dealer who is resident in Canada and who pays or receives the amount in the ordinary course of its business of trading in securities.

This new definition applies to securities lending arrangements made after 2001.

"qualified security"

The securities lending arrangement rules apply only to securities that are qualified securities. A new paragraph (e) is added to the definition "qualified security" to include a qualified trust unit.

This amended definition applies to securities lending arrangements made after 2001.

"qualified trust unit"

A "qualified trust unit" is defined to mean a unit of a mutual fund trust that is listed on a prescribed stock exchange.

This new definition applies to securities lending arrangements made after 2001.

"securities lending arrangement"

There are three amendments to the definition "securities lending arrangement".

Paragraph (a) of the existing definition provides that in order for there to be a securities lending arrangement, the lender and the borrower of a security must be dealing at arm's length. The amendment to paragraph (a) extends the definition to include an arrangement entered into by non-arm's length parties. New paragraph (e) provides that where the lender and borrower do not deal with each other at arm's length, the arrangement must be of a term not exceeding 270 days and must not be part of a series of securities lending arrangements, loans or other transactions intended to be in effect for more than 270 days.

Paragraph (c) of the existing definition provides that where a borrowed security is a share, the borrower must be obligated to pay to the lender a dividend compensation payment in order for the transaction to be a securities lending arrangement. This paragraph is amended to apply a comparable requirement in respect of all arrangements. This recognizes and codifies the commercial reality that compensation payments are required to be made by the borrower to the lender in all securities lending arrangements, and not just those arrangements involving shares.

The amendment to paragraph (c) applies to arrangements made after 2001. The amendments to paragraphs (a) and (e) apply to arrangements made after 2002.

"security distribution"

"Security distribution" is a newly-defined term, introduced not to effect any substantive change to the relevant rules but only for simplicity and clarity. A security distribution is an amount, in respect of a borrowed security, that is either an underlying payment paid by the issuer of the security (for example as a dividend or a trust distribution) or a dealer compensation payment, or an SLA compensation payment.

This definition applies to securities lending arrangements made after 2001.

"SLA compensation payment"

"SLA compensation payment" is a newly-defined term, introduced not to effect any substantive change to the relevant rules but only for simplicity and clarity. An SLA compensation payment is an amount paid pursuant to a securities lending arrangement as compensation for an underlying payment.

This definition applies to securities lending arrangements made after 2001.

"underlying payment"

"Underlying payment" is a newly-defined term. As with most of the other new definitions in this subsection, this term is defined for simplicity and clarity. An underlying payment is an amount paid on a qualified security by the issuer of the security.

This definition applies to securities lending arrangements made after 2001.

Deemed Character of Compensation Payments

ITA
260(5) and (5.1)

Subsection 260(5) of the Act, in its current form, treats dividend compensation payments that are received under specified circumstances as dividends. The subsection also, however, denies this dividend treatment where the amount is received by a corporation and one of the main reasons for the corporation entering into the arrangement was to enable it to receive an amount that would be treated as a dividend by the subsection.

Subsection 260(5) is reorganized into two subsections, and these subsections incorporate three newly-defined terms: "dealer compensation payment", "SLA compensation payment" and "underlying payment".

New subsection 260(5) describes the circumstances under which the compensation payment deeming rule, now found in new subsection 260(5.1), applies. The deeming rule applies where an amount is received under a securities lending arrangement under one of these circumstances: from a person resident in Canada, from a person not resident in Canada where the amount was paid in the course of carrying on business in Canada through a permanent establishment, or from or by a registered securities dealer. These are essentially the same as the circumstances specified prior to the amendment.

Also, the anti-avoidance rule in this subsection – which currently addresses only the case of an amount that would otherwise be received by a corporation as a dividend – is amended to include all otherwise non-taxable amounts that may be received under a securities lending arrangement, by any person. This amendment recognizes that with the introduction of qualified trust units as "qualified securities," a person may be treated as having received any of several kinds of non-taxable amounts.

New subsection 260(5.1) of the Act treats a given compensation payment as one of three things: a dividend, an amount paid by a trust and having the same characteristics, source and purpose as the "underlying payment" amount paid by the trust directly, or interest. The overall effect of the provision is, in addition to replicating the former dividend deeming rule, to deem compensation payments in respect of payments from a trust to have the same characteristics, source and purpose as if the amounts were paid by the trust.

These amendments apply to securities lending arrangements made after 2001 except that if the parties to an arrangement file a joint election in writing within 90 days after Royal Assent of this amendment with the Minister of National Revenue, the parties may elect such that either one or both of the deeming rules in paragraph 260(5.1)(b) or (c) will not apply with respect to non-dividend compensation payments received before February 28, 2004. Taxpayers may wish to make this election to leave open the possibility that these non-dividend compensation payments had a different characterization under the law prior to these amendments.

Deductible Compensation Payment Amount

ITA
260(6)

Subsection 260(6) of the Act limits the extent to which a person who makes a dividend compensation payment under a securities lending arrangement may deduct the payment in computing income from a business or property. In brief, the subsection denies a deduction for any dividend compensation payment made by persons other than registered securities dealers, and provides that registered securities dealers may deduct up to 2/3 of the dividend compensation payments they make.

Amended subsection 260(6) retains this 2/3 dividend compensation payment deduction for registered securities dealers. It also allows any taxpayer - including but not limited to registered securities dealers - a deduction in respect of compensation payments, either SLA compensation payments or dealer compensation payments, that are not dividend compensation payments. The amount of this new deduction is computed differently depending on the actions of the taxpayer in question (the one who made the payment and seeks to deduct it). If the taxpayer has disposed of the borrowed security and has included any resulting gain or loss in computing business income, the compensation payment is fully deductible. In any other case, new subsection 260(6) allows a deduction to the extent of the lesser of (i) the compensation payment and (ii) the amount, to which the compensation payment relates, included in the taxable income of the taxpayer or persons related to it.

Amended subsection 260(6) applies to securities lending arrangements made after 2001.

Deduction - Compensation Payments

ITA
260(6.1)(a)

Subsection 260(6.1) of the Act provides a deduction for dividend compensation payments made pursuant to certain dividend rental arrangements. The amount deductible is the lesser of the amount the corporation is obligated to pay as compensation under the arrangement and the amount of the dividends received by the corporation under the arrangement that were identified in its return of income as amounts which are not deductible because of subsection 112(2.3) of the Act.

Paragraph 260(6.1)(a) of the Act is amended to clarify that the amount described in that paragraph is the total of all amounts that the corporation becomes obligated in the taxation year to pay to another person as compensation under certain dividend rental arrangements.

Also, paragraph 260(6.1)(a) of the English version of the Act is amended, as a consequence of the amendments to the definition "dividend rental arrangement" in subsection 248(1) of the Act, by replacing the reference to "paragraphs (c) and (d)" of that definition to a reference to "paragraph (b)" of that definition.

This amendment applies to dividend rental arrangements made after December 20, 2002 and, if the parties jointly elect within 90 days after this Act has been assented to, it also applies to dividend rental arrangements made after November 2, 1998 and on or before December 21, 2002, except that before 2002 the reference to "subsection 260(5.1)" should be read as "subsection 260(5)".

For arrangements made after 2001 and before December 21, 2002 that are not the subject of the election described in the previous paragraph, the definition "dividend rental arrangement" in effect before December 21, 2002 is applicable, except that the reference to "subsection 260(5)" in that definition should be read as "subsection 260(5.1)".

Dividend Refund

ITA
260(7)

Subsection 260(7) of the Act provides that, where a corporation makes a payment which is deemed by the former subsection 260(5) to be a taxable dividend, the corporation will also be entitled to treat the amount as the payment of a dividend for the purposes of section 129 of the Act.

Subsection 260(7) is amended to replace the reference "subsection 260(5)" with "subsection 260(5.1)" and is reorganized for clarity and simplicity and specifically not to effect any substantive changes to the rule.

This amendment applies to securities lending arrangements made after 2001.

Non-resident Withholding Tax

ITA
260(8), (8.1) and (8.2)

Subsection 260(8) of the Act applies special rules, for the purposes of Part XIII of the Act, to payments made under securities lending arrangements. The subsection has two main aspects: rules that ensure the appropriate treatment for Part XIII purposes of compensation payments; and a rule that in certain circumstances will treat a borrower as having paid to a lender a "borrow fee".

In addition to incorporating the newly added definitions, SLA compensation payments and underlying payments (which do not effect any substantive changes), the subsection is rearranged into three separate subsections. Amended subsection 260(8) retains the previous rules for compensation payments relating to interest and dividends, confining them to amounts paid on a security that is not a qualified trust unit. Subsection 260(8) also provides for compensation payments made in respect of a borrowed qualified trust unit: these are treated as payments from a trust and as having the same character and composition as the trust payments for which they compensate.

New subsection 260(8.1) provides for a deemed borrow fee, on the same basis as the existing paragraph 260(8)(b). New subsection 260(8.2) similarly preserves the effect of the existing postamble to subsection 260(8) in relation to tax treaties.

These subsections apply to securities lending arrangements made after 2001.

Partnerships

ITA
260(10), (11), and (12)

A "securities lending arrangement" (SLA) is defined in subsection 260(1) of the Act as a particular transaction between two persons: the "lender" and the "borrower" of a security. A partnership - which for most purposes of the Act is not a person - can be a party to a transaction that would be an SLA if the partnership were a person. In such a case, it is appropriate in policy terms for the arrangement to be treated as an SLA. New subsections (10), (11) and (12) are added to section 260 to bring partnerships within the SLA rules.

New subsection 260(10) provides that, for the purposes of section 260, a person includes a partnership. This allows a partnership to be either the borrower or the lender in respect of an SLA. The subsection also treats a partnership as a registered securities dealer, if all of its members are themselves registered securities dealers.

A transaction's status as an SLA is relevant to, among other things, the tax treatment of amounts paid and received in compensation for dividends or interest on the security that is transferred or lent. New subsections 260(11) and (12) are added to ensure the appropriate treatment of these amounts in a case where a corporation or an individual is a member of a partnership that has entered into an SLA.

These amendments apply to SLAs made after December 20, 2002 and, if the parties jointly elect within 90 days after this Act has been assented to, they also apply to SLAs made after November 2, 1998 and on or before December 20, 2002, except that before 2002, the reference to "subsection 260(5.1)" should be read as "subsection 260(5)".

Clause 193

ITA
Schedule

For information about this new schedule, see the commentary to subsection 181(1) of the Act.

Clause 194

Repeal of Paragraph 18(1)(m)

Subsection 2(5) of the Act to Amend the Income Tax Act (Natural Resources) repealed paragraph 18(1)(m) of the Act effective for taxation years that begin after 2006. Subsection 2(5) is being amended with the result that paragraph 18(1)(m) is now being repealed effective for taxation years that begin after 2007. This amendment is being made to accommodate a reimbursement made in a taxation year of the taxpayer that begins after 2006 and before 2008 in circumstances where the taxpayer’s taxation year does not coincide with the taxation year or fiscal period of the recipient, as would normally be the case where the recipient of the reimbursement is a partnership of which the taxpayer is a member.

Clause 195

Amendment to An Act to Amend the Income Tax Act (Natural Resources)

Subsection 80.2 of the Act was repealed by section 9 of An Act to Amend the Income Tax Act (Natural Resources), S.C. 2003, c.28, effective for taxation years that begin after 2006. Section 9 of that Act is being repealed with the result that section 80.2 will continue in force. However, section 80.2 will apply only to specified amounts paid in respect of original amounts that are paid or become payable or receivable in taxation years or fiscal periods of the recipient that begin before 2007. As a result, section 80.2 will only apply to a reimbursement if the recipient is subject to restrictions on the deductibility of the reimbursed Crown charge (i.e., the Crown charge is described in paragraph 18(1)(m)) or is required to include some portion of the Crown charge in income (i.e., the Crown charge is described in paragraph 12(1)(o)).

The repeal of section 9 of the Act to Amend the Income Tax Act (Natural Resources) extends the possible application of section 80.2 to a reimbursement that is made in a taxation year of the taxpayer that begins after 2006 (assuming the reimbursed Crown charge was imposed in a taxation year or fiscal period of the recipient that begins before 2007). This extension of section 80.2, along with the extension of paragraph 18(1)(m) will accommodate, among other things, a reimbursement of a Crown charge by a member of a partnership, as described in new subsection 80.2(4), where such reimbursement is made in a taxation year of the member that begins after 2006 and before 2008.

Clause 196

Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act

Nova Scotia Capital Tax

The Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act (Accord Act) was introduced consequential to the Canada-Nova Scotia Offshore Petroleum Resources Accord, which was entered into by the Government of Canada and the Government of Nova Scotia on August 26, 1986. Under the Accord Act, the federal government imposes, collects and remits to the province the corporate income tax, consumption tax and insurance premiums tax on corporations operating in the offshore area that would be levied by Nova Scotia if the offshore area were a part of the province. Subsequent to the introduction of the Accord Act, Nova Scotia established a tax on the capital of large corporations (LCT). This measure amends the Accord Act to include capital tax among those taxes imposed, collected, and remitted under it.

This change is deemed to have come into force on April 1, 1997, the effective date of the LCT.

Amendments to the Federal – Provincial Fiscal Arrangements Act

Clause 197

Deduction for Federal Tax

FPFAA
12.2

Part IV.1 of the Federal-Provincial Fiscal Arrangements Act (FPFAA) provides a revenue-sharing mechanism in respect of the tax collected under Part VI.1 of the Income Tax Act (Canada) (ITA). A province is entitled to a portion of the federal tax collected from corporations that operate in the province in a year, if two conditions are met. First, it must be the case either that Canada collects the province’s corporate income tax under a tax collection agreement, or that the province’s law allows a multiple of the Part VI.1 tax to be deducted in computing taxable income. Second, the province itself must not impose taxes similar to those imposed under Parts IV.1 and VI.1 of the ITA.

The condition that the province itself provide a deduction is currently set out, in paragraph 12.2(1)(b) of the FPFAA, as requiring a deduction of at least 9/4 of a corporation’s ITA Part VI.1 tax. The 9/4 figure is taken from the deduction under ITA paragraph 110(1)(k). With the adjustment of that ITA deduction, the figure 9/4 is no longer appropriate. Paragraph 12.2(1)(b) of the FPFAA is, therefore, amended to require a deduction, for provincial tax purposes, that is not less than the amount deductible under the ITA provision. By referring to the ITA rule itself, rather than specifying a given figure, amended paragraph 12.2(1)(b) will not need to be further amended if the multiple provided in the ITA should change at some future time.

To ensure that provinces have an opportunity to make any necessary amendments to provincial legislation, this amendment applies after 2003.

Amendments to the Income Tax Amendments Act, 2002

Clause 198

S.C. 2000, c. 17, ss. 59(2)

Debt Forgiveness Rules

Subsection 59(2) of the Income Tax Amendments Act, 2000 is amended to provide that, in computing a debtor’s income for a particular taxation year, the fraction in paragraph 38(a) of the Income Tax Act to be applied in respect of the settlement of a commercial debt obligation is the fraction in that paragraph that applied to the debtor in the debtor’s taxation year in which the obligation was deemed to have been settled instead of the fraction in that paragraph that applies to the debtor in the particular taxation year.

This change corrects a technical deficiency, and is deemed to have come into force on June 14, 2001.

Clause 199

S.C. 2000, c. 17, ss. 70(11)

Disposition of Shares in a Foreign Affiliate

ITA
93(1.2)

Section 93 of the Income Tax Act contains a number of rules relating to the disposition of shares of a foreign affiliate of a taxpayer resident in Canada.

Subsection 93(1.2) provides that, where a particular corporation resident in Canada or a foreign affiliate of the particular corporation (each of which is referred to as the "disposing corporation") would, but for this subsection, have a taxable capital gain from a partnership from the disposition by the partnership of shares of a class of the capital stock of a foreign affiliate of the corporation, and the disposing corporation so elects in prescribed manner in respect of the gain, the amount designated will reduce the taxable capital gain and will be grossed up and recharacterized as a dividend received on the share by the disposing corporation.

Paragraph 93(1.2)(a) provides that twice the amount designated by the disposing corporation in respect of the shares (or where subsection 93(1.3) applies, twice the amount determined under that subsection) will be treated as a dividend received on the shares by the disposing corporation from the foreign affiliate.

Before the present amendment, subsection 93(1.2) was applicable to taxation years that end after February 27, 2000. This amendment ensures that, for a taxation year of a taxpayer that includes either February 28, 2000 or October 17, 2000 or began after February 28, 2000 and ended before October 17, 2000, the reference to the word "twice" is to read as references to the reciprocal of the capital gains inclusion rate applicable to the corporation resident in Canada or to the foreign affiliate for the taxation year. This amendment corrects a technical deficiency.

Part 3 

Amendments Related to Bijuralism

As part of the harmonization of federal legislation, the Government has undertaken to review all its legislation where provincial private law concepts are found in order to reflect appropriately the common law and the civil law, in both official languages.

As part of this harmonization initiative, federal tax legislation is being reviewed. Several changes to the legislation have already been implemented, namely by way of the Income Tax Amendments Act, 2000, S.C. 2001, c. 17. The proposed amendments continue this harmonization initiative.

This Part proposes amendments to the Income Tax Act concerning the concepts of "joint and several liability" / "solidary liability", "tangible property" / "corporeal property", "intangible property" / "incorporeal property", "personal property" / "movable property", "real property" / "immovable property", "interest" / "right" which are further described below. The proposed amendments are not intended to change the current application of the amended provisions; they purport to reflect the concepts and terminology of the common law and the civil law in both official languages. They will come into force on Royal Assent to this Bill.

Joint and Several Liability and Solidary Liability

The French version of the current tax legislation uses the term "solidairement", which is appropriate for both civil law and common law. Therefore, the French version does not need to be amended.

In the English version of the current tax legislation, only the term "jointly and severally" is used. This term is maintained for common law purposes. The term "jointly and severally" is no longer adequate in civil law in English and has been replaced with the term "solidarily". Therefore, it is appropriate to add the term "solidarily" in the English version in order to reflect the civil law.

Tangible and Corporeal Property

In the French version of the current tax legislation, only the civil law terminology "bien corporel" is used. In the English version, only the common law term "tangible property" is used.

In the French version of the legislation, it is appropriate to add the term "bien tangible" in order to reflect the common law.

In the English version of the legislation, it is appropriate to add the term "corporeal property" in order to reflect the civil law.

Intangible and Incorporeal Property

In the French version of the current tax legislation, only the civil law terminology "bien incorporel" is used. In the English version, only the common law term "intangible property" is used.

In the French version of the legislation, it is appropriate to add the term "bien intangible" in order to reflect the common law. Where it is appropriate to do so, the shared elements of the relevant terms are combined in the phrase "bien incorporel ou intangible", which refers to both systems of law.

In the English version of the legislation, it is appropriate to add the term "incorporeal property" in order to reflect the civil law. Where it is appropriate to do so, the shared elements of the relevant terms are combined in the phrase "intangible or incorporeal property", which refers to both systems of law.

Personal Property and Movable Property

In the French version of the current tax legislation, only the civil law terminology "bien meuble" is used. In the English version, the terms "personal property" and "chattels" are used to reflect the common law.

It is therefore appropriate to add in the French version a reference to the term "bien personnel" in order to reflect the common law. Where it is appropriate to do so, the shared elements of the relevant terms are combined in the phrase "bien meuble ou personnel", which refers to both systems of law.

In the English version of the legislation, the term "movable" is added in order to reflect the civil law. Where it is appropriate to do so, the shared elements are combined in the phrase "personal or movable property", which refers to both systems of law.

Real Property and Immovable Property

In the French version of the current tax legislation, only the civil law terminology "bien immeuble" is used. In the English version, only the common law concept of "real property" is used.

It is therefore appropriate to add a reference, in the French version, to the term "bien réel" in order to reflect the common law. Where it is appropriate to do so, the shared elements of the relevant terms are combined in the phrase "bien immeuble ou réel", which refers to both systems of law.

In the English version of the legislation, the term "immovable" is added in order to reflect the civil law. Where it is appropriate to do so, the shared elements of the relevant terms are combined in the phrase "real or immovable property", which refers to both systems of law.

Interest and Right

Generally, in the current tax legislation, the common law term "interest" and the civil law term "droit" are used to refer to the relationship that exists between a person and property. At common law, it is possible to have a right or an interest in property; an interest in property necessarily involves rights in property while the reverse is not always true.

For purposes of the civil law, it is appropriate to limit the application of the term "droit" in the French version to the civil law, unless otherwise provided. In the English version, it is appropriate to add a reference to the concept of "right" in order to address the civil law audience and to similarly limit the application of this term to the civil law, unless otherwise provided.

The term "interest" is a common law concept that is translated into French by the term "intérêt". It is therefore appropriate to add a reference to the concept of "intérêt" in the French version in order to address the common law audience.

Subsections 20(17) and 20(18)

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

Subsections 248(4) and 248(4.1): Interest in Real Property and Real Right in Immovables

Subsection 248(4) of the current legislation uses the term "droit sur un bien immeuble" in the French version as equivalent for the term "interest in real property" used in the English version. The term refers to the relationship between a person and property and for purposes of the I.T.A. includes a leasehold interest but not an interest as security.

Subsection 248(4) is amended so as to provide, for common law purposes, the scope of the term "interest in real property." Reference to the civil law term "hypothecary claim" is removed from the English version of the provision. Furthermore, the term "intérêt sur un bien réel"is added in the French version of the Act. This term is the French equivalent of the common law term "interest in real property".

For civil law purposes, new subsection 248(4.1) is added in both linguistic versions of the Act. The scope of the civil law term "real right in immovables" / "droit réel sur un immeuble" is adjusted in a similar manner as its common law counterpart by including the lease and excluding security rights.


Appendix A

Draft Income Tax Regulations
and Explanatory Notes

Status of Corporations and Trusts

   1. (1) Paragraph 4800(1)(a) of the French version of the Income Tax Regulations is replaced by the following:

   a) une catégorie d'actions du capital-actions de la société désignée par la société dans son choix ou par le ministre dans son avis à la société, selon le cas, doit pouvoir faire l'objet d'un appel public à l'épargne;

   (2) Paragraph 4800(2)(c) of the French version of the Regulations is replaced by the following:

   c) aucune catégorie d'actions du capital-actions de la société ne peut faire l'objet d'un appel public à l'épargne ni ne remplit les conditions énoncées aux alinéas (1)b) et c).

   2. The portion of section 4800.1 of the Regulations before paragraph (a) is replaced by the following:

   4800.1 For the purposes of paragraph 107(1)(a) and subsections 107(1.1), (2) and (4.1) of the Act, the following are prescribed trusts:

   3. The portion of section 4801 of the Regulations before subparagraph (b)(i) is replaced by the following:

   4801.

In applying at any time paragraph 132(6)(c) of the Act, the following are prescribed conditions in respect of a trust:

(a) either

(i) both

(A) there has been at or before that time a lawful distribution in a province to the public of units of the trust and a prospectus, registration statement or similar document was not, under the laws of the province, required to be filed in respect of the distribution, and

(B) the trust

(I) was created after 1999 and on or before that time, or

(II) is a trust that satisfies, at that time, the conditions prescribed in section 4801.001, or

(ii) a class of the units of the trust is, at that time, qualified for distribution to the public; and

(b) in respect of a class of the trust's units that meets at that time the conditions described in paragraph (a), there are at that time no fewer than 150 beneficiaries of the trust, each of whom holds

   4. The Regulations are amended by adding the following after section 4801:

   4801.001

For the purpose of applying at any particular time subclause 4801(a)(i)(B)(II), the following are the prescribed conditions:

(a) the trust was created before 2000;

(b) the trust was on Announcement Date a unit trust;

(c) the particular time is after 2003; and

(d) the trust elects by notifying the Minister, in writing, no later than on the trust's filing-due date for its 2005 taxation year, that this section applies to it.

5. The portion of subsection 4803(2) of the French version of the Regulations before paragraph (c) is replaced by the following:

(2) Pour l'application de la présente partie, une catégorie d'actions du capital-actions d'une société ou une catégorie d'unités d'une fiducie ne peut faire l'objet d'un appel public à l'épargne que si :

a) un prospectus, une déclaration d'enregistrement ou un document semblable a été produit auprès d'une administration au Canada selon la législation fédérale ou provinciale et, si la loi le prévoit, approuvé par l'administration, et les actions ou unités de cette catégorie ont fait l'objet d'un appel public légal à l'épargne conformément à ce document;

b) il s'agit d'une catégorie d'actions, dont une ou plusieurs des actions ont été émises par la société à un moment, postérieur à 1971, où elle était une société publique, en échange d'actions de toute autre catégorie du capital-actions de la société qui pouvait, immédiatement avant l'échange, faire l'objet d'un appel public à l'épargne;

   6. (1) Sections 1, 3 and 5 apply to the 2000 and subsequent taxation years.

   (2) Section 2 applies after 1999.

   (3) Section 4 applies to the 2004 and subsequent taxation years and a trust's election referred to in paragraph 4801.001(d) of the Income Tax Regulations, as enacted by section 4, is deemed to have been filed by the trust on its filing-due date for its 2005 taxation year if the election is filed by the trust in writing with the Minister of National Revenue within 60 days after the day on which these Regulations are published in Part II of the Canada Gazette.


Status of Corporations and Trusts 

Explanatory Notes

Part XLVIII of the Income Tax Regulations contains conditions used to determine the status of a corporation or trust for the purpose of certain provisions of the Income Tax Act.

ITR
4800

Subsections 4800(1) and (2) of the Regulations contain prescribed conditions that apply for the purposes of applying the definition "public corporation" in subsection 89(1) of the Act. That definition applies in determining whether a corporation resident in Canada is a public corporation for income tax purposes. One of the prescribed conditions in both of these subsections relates to whether a class of shares of the capital stock of the corporation is "qualified for distribution to the public" or not. Subsection 4803(2) of the Regulations defines the expression "qualified for distribution to the public" for the purposes of Part XLVIII.

The French-language version of paragraphs 4800(1)(a) and (2)(c) of the Regulations is amended to ensure that the French-language expression "peut faire l’objet d’un appel publique à l’épargne", which is the equivalent to the English-language expression "qualified for distribution to the public", is used consistently in Part XLVIII and carries the meaning assigned by subsection 4803(2) of the Regulations. By correcting a potential ambiguity in the French-language version of the Regulations, these amendments ensure that the tax policy objectives of the provisions are fully met. These amendments do not reflect a change in tax policy.

These amendments apply to the 2000 and subsequent taxation years.

For more detail on a related set of amendments, see the commentary on paragraphs 4803(2)(a) and (b).

ITR
4800.1

Section 4800.1 of the Regulations provides a list of trusts that are prescribed for a number of identified provisions in the Act. Section 4800.1 is amended to update the list of provisions in the Act for which it applies. As a result, a reference to subsection 107(1.1) of the Act is added and a reference to paragraph 108(1)(c) of the Act is removed. The amendments to the Act that give rise to the need for these changed references have generally had effect since the start of 2000.

ITR
4801 and 4801.001

Section 4801 of the Regulations contains a number of prescribed conditions that apply for the purposes of paragraph 132(6)(c) of the Act. These conditions must be met in order for a trust to qualify for income tax purposes as a mutual fund trust. The expression "mutual fund trust" is defined in subsection 132(6) of the Act.

Part XLVIII of the Regulations is amended – by adding subclause 4801(a)(i)(B)(II) and section 4800.001 - so that a trust created before 2000 that is a widely-held unit trust may qualify as a mutual fund trust where it makes a lawful distribution in a province to the public of its units and a number of other conditions are met. This amendment – which extends to trusts created before 2000 a similar existing rule that applies only to trusts created after 1999 – applies only for the 2004 and subsequent taxation years and only to trusts that elect for section 4801.001 to apply.

Section 4801 is also amended to update the language of the provision – these changes do not represent a change in tax policy. These amendments apply to the 2000 and subsequent taxation years.

ITR
4803

Subsection 4803(2) of the Regulations defines the expression "qualified for distribution to the public" for the purposes of Part XLVIII. The French-language equivalent to that expression has been updated and is now the expression "peut faire l’objet d’un appel publique à l’épargne". That expression is used in a number of provisions in Part XLVIII, including paragraphs 4800(1)(a) and (2)(c) and 4801(a).

The French-language version of subsection 4803(2) is amended to reflect the new French-language equivalent to the English-language expression "qualified for distribution to the public". This is intended to ensure that that expression is used consistently in Part XLVIII and carries the meaning assigned by subsection 4803(2). By correcting a potential ambiguity in the French-language version of the Regulations, these amendments ensure that the tax policy objectives of the provisions are fully met.

These amendments apply to the 2000 and subsequent taxation years.

For more detail on a related set of amendments, see the commentary on paragraphs 4800(1)(a) and (2)(c). These amendments do not reflect a change in tax policy.


1. Subparagraph 142.6(1)(b)(i)     [Back]

2. Subparagraph 142.6(1)(b)(ii)     [Back]

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