# Archived - Explanatory Notes to Legislative Proposals Relating to Certain Income Tax Measures Announced in Budget 2005

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Clause 1

Disability Supports Deduction

ITA
64

Section 64 of the Act permits the deduction of disability supports expenses incurred to enable the taxpayer to work, to attend secondary school or to attend a designated educational institution, unless they have been reimbursed by a non-taxable payment. The effect of this deduction is that no income tax is payable on income (including government assistance) used to pay for these expenses, and that this income is not used in determining the value of income-tested benefits.

Clauses 64(1)(A)(ii)(F) to (H) are amended to change the reference to "mental or physical impairment" to "impairment in physical or mental functions". This change in terminology is consequential to a similar change to subsection 118.3(1) of the Act (disability tax credit) suggested by the Technical Advisory Committee on Tax Measures for Persons with Disabilities.

Section 64 is further amended to expand the list of expenses eligible for the disability supports deduction by adding amounts paid for:

• Job coaching services used by individuals who have a severe and prolonged impairment (and paid to persons engaged in the business of providing such services). These services do not include job placement or career counselling services. The need for these services must be certified by a medical practitioner.
• Reading services used by individuals who are blind or who have a severe learning disability (and paid to persons engaged in the business of providing such services). The need for these services must be certified by a medical practitioner.
• Deaf-blind intervening services used by individuals who are both blind and profoundly deaf (and paid to persons engaged in the business of providing such services).

In addition, where a medical practitioner certifies the need for the following devices or software, the following expenses will also be eligible for this deduction:

• Bliss symbol boards used by individuals who have a speech impairment to help them communicate by motioning at the symbols or by spelling-out words.
• Braille note-takers used by individuals who are blind to allow them to take notes (that can be read back to them or printed or displayed in Braille) with the help of a keyboard.
• Page-turners used by individuals with a severe and prolonged impairment that markedly restricts their ability to use their arms or hands to turn the pages of a book or other bound document.
• Devices and software designed to be used by individuals who are blind or who have a severe learning disability to enable them to read print.

These amendments apply to the 2005 and subsequent taxation years.

Clause 2

Tax Deferred Cooperative Shares

ITA
87(2)(s)

New paragraph 87(2)(s) of the Act is added as a consequence of the addition of the new rules in section 135.1 relating to the payment of tax-deferred patronage dividends by agricultural cooperative corporations. Paragraph 87(2)(s) provides that for the purpose of section 135.1, if the new corporation formed on an amalgamation is, at the beginning of its first taxation year, an agricultural cooperative corporation,

(i) the new corporation is deemed to be the same corporation as, and a continuation of each predecessor corporation that was an agricultural cooperative corporation and

(ii) if, on the amalgamation, the new corporation issues a new share that is described in all of paragraphs (b) to (d) of the definition "tax deferred cooperative share" in subsection 135.1(1) in exchange for a tax deferred cooperative share ("old share") of a predecessor corporation and the amount of paid-up capital, and the amount that the taxpayer is entitled to receive on a redemption, acquisition or cancellation, of the new share are equal to those amounts, in respect of the old share, the new share is deemed to have been issued at the time the old share was issued, and in applying subsection 135.1(2), the taxpayer is deemed to have disposed of the old share for nil proceeds.

This amendment applies after 2005. It should be noted that as a result of existing paragraph 88(1)(e.2) of the Act, the equivalent of new paragraph 87(2)(s) will in effect apply to windings-up under subsection 88(2).

Clause 3

ITA
117.1(1)

Subsection 117.1 (1) provides for the indexing of various amounts, including the amounts on which the personal tax credits are based. The indexing is based on annual increases in the Consumer Price Index.

Subsection 117.1 (1) is amended to add a reference to new section 118.01, the adoption expense tax credit.

This amendment applies to the 2006 and subsequent taxation years.

Clause 4

ITA
118.01

New section 118.01 of the Act provides a tax credit in respect of eligible adoption expenses incurred in respect of the completed adoption of an eligible child, up to a maximum of $10,000 (to the extent that the adoptive parent has not been reimbursed in respect of eligible expenses and is not entitled to be so reimbursed). Individuals may include eligible adoption expenses incurred during the adoption period, generally defined as the period that begins at the earlier of the time the child's adoption file is opened with the provincial or territorial ministry responsible for adoption or a licensed adoption agency, and the time, if any, that an application related to an adoption is made to a Canadian court and that ends at the later of the time the adoption is finalized and the time the adopted child begins to live with the adoptive parent. To be eligible for the credit, a parent must submit proof of an adoption in the form of a Canadian or foreign adoption order, or otherwise demonstrate that all of the legal requirements of the jurisdiction in which the parent resides have been met in completing the adoption. Individuals must claim the credit in the taxation year in which the adoption period ends. New section 118.01 applies to the 2005 and subsequent taxation years. Definitions ITA 118.01(1) New subsection 118.01(1) of the Act sets out certain definitions and rules that apply for the purpose of the adoption expense tax credit. "adoption period" "Adoption period" in respect of an eligible child is defined as the period that begins at the earlier of the time that the adoption file is opened with a provincial or territorial ministry responsible for adoption (or with a licensed adoption agency) and the time, if any, that an application related to the adoption is made to a Canadian court and that ends at the later of the time that an adoption order is issued by, or recognized by a government in Canada and the time that the child first begins to permanently reside with the adoptive parent. "eligible adoption expenses" "Eligible adoption expenses" in respect of an eligible child are defined to include • fees paid to an adoption agency licensed by a provincial or territorial government, • court, legal and administrative expenses related to an adoption order in respect of the child, • reasonable and necessary travel and living expenses for the child and the adoptive parents, • document translation fees, • mandatory fees paid to a foreign institution, and • any other reasonable expenses required by a provincial or territorial government or an adoption agency licensed by a provincial or territorial government. "eligible child" "Eligible child" means a child who has not attained the age of 18 years at the time the adoption order is issued by, or recognized by a government in Canada. Calculation of Adoption Expense Tax Credit ITA 118.01(2) New subsection 118.01(2) of the Act provides for the calculation of the adoption expense tax credit in respect of the adoption of an eligible child. The credit is determined by applying the appropriate percentage (16% in 2005) to the lesser of$10,000 and the amount obtained when reimbursements and other forms of assistance (other than an amount that is included in computing the individual's income and that is not deductible in computing the individual's taxable income) that any individual is or was entitled to receive in respect of an eligible adoption expense is subtracted from the amount of eligible adoption expenses incurred in respect of an eligible child.

Maximum Amount of Credit

ITA
118.01(3)

New subsection 118.01(3) of the Act provides that, where more than one individual is entitled the adoption expense tax credit in respect of the same eligible child, the total amounts claimed by those individuals can not exceed the maximum amount that would be allowed if only one individual were claiming the adoption expense tax credit in respect of that child.

Clause 5

Medical Expense Credit

ITA
118.2(1)

Section 118.2 of the Act provides rules for determining the amount that may be claimed as a tax credit in respect of an individual's medical expenses.

Subsection 118.2(1) provides the calculation of an individual's medical expense tax credit (METC). The description of D in that subsection includes in the individual's medical expenses amounts paid by the individual in respect of a dependant (other than an individual's spouse, the individual's common-law partner or child of the individual who has not attained the age of 18 years) to the lesser of $5,000 and the amount by which the expenses paid by the individual on behalf of the dependant exceed the dependant's medical expense threshold for the year or 3% of net income. The description of D is amended to increase the$5,000 limit to \$10,000, effective for the 2005 taxation year.

Medical Expenses

ITA
118.2(2)

Subsection 118.2(2) contains a list of expenditures that qualify as eligible medical expenses.

Paragraph 118.2(2)(i) is amended to add the cost to purchase, operate, and maintain phototherapy equipment prescribed for the treatment of psoriasis or other skin disorders to the list of items that qualify as medical expenses. Further, while the cost of purchasing an oxygen concentrator is currently an eligible expense under paragraph 118.2(2)(k), a reference to oxygen concentrator is added to paragraph 118.2(2)(i) to extend eligibility under the METC to expenses incurred to operate an oxygen concentrator, including the cost of electricity. This amendment applies to the 2005 and subsequent taxation years.

Paragraph 118.2(2)(l.2) allows reasonable expenses relating to modifications to a dwelling of an individual who lacks normal physical development or is confined to a wheelchair to qualify as medical expenses.

Paragraph 118.2(2)(l.2) is amended in two respects. First, in order to qualify as a medical expense, the renovation or alteration to the home must not typically be expected to increase the value of the home. Secondly, the expenses must be of a type that would not typically be incurred by persons without such an impairment. Only expenses that meet both of these criteria will be eligible to be claimed under the medical expense tax credit. This amendment applies to expenses incurred after February 22, 2005.

Most medical and disability-related home renovation expenses will remain eligible under the medical expense tax credit, including, for example, the cost of installing entrance and exit ramps, widening doorways, lowering shelves, modifying kitchen cabinets and moving electrical outlets.

Similar to paragraph 118.2(2)(l.2) described above, paragraph 118.2(2)(l.21) allows reasonable expenses relating to the construction of the principal place of residence of an individual who lacks normal physical development or is confined to a wheelchair to qualify as medical expenses, that can reasonably be considered to be incremental costs incurred to enable the individual to gain access to, or to be mobile and functional within, the individual's principal place of residence.

Paragraph 118.2(2)(l.21) is amended in two respects. First, in order to qualify as a medical expense, the incremental costs incurred during the construction of the residence must not typically be expected to increase the value of the home. Secondly, the incremental costs must be of a type that would not typically be incurred by persons without such an impairment. Only expenses that meet both of these criteria are eligible to be claimed under the medical expense tax credit. This amendment applies to expenses incurred after February 22, 2005.

New paragraph 118.2(2)(1.43) adds to the list of eligible medical expenses amounts paid for reading services on behalf of individuals who are blind or have a severe learning disability. In order to qualify as medical expenses, the amount must be paid to persons engaged in the business of providing such services and a medical practitioner must certify the need for those services. This amendment applies to the 2005 and subsequent taxation years.

New paragraph 118.2(2)(1.44) adds to the list of eligible medical expenses amounts paid for deaf-blind intervening services on behalf of individuals who are blind and profoundly deaf. In order to qualify as medical expenses, the amount must be paid to persons engaged in the business of providing such services. This amendment applies to the 2005 and subsequent taxation years.

New paragraphs 118.2(2)(r) and (s) add to the list of eligible medical expenses amounts paid for drugs or devices purchased under Health Canada's Special Access Programme on behalf of the patient. This programme allows access to drugs or medical devices that have not yet been approved for sale in Canada. Special access can be requested in emergency cases or when conventional therapies have failed, are unsuitable or are unavailable. This amendment applies to the 2005 and subsequent taxation years.

New paragraph 118.2(2)(u) adds to the list of eligible medical expenses amounts paid for medical marihuana. To be an eligible expense under the METC, medical marihuana must be purchased from either Health Canada or a designated grower, by a patient authorized to use the drug for medical purposes under Health Canada's Medical Marihuana Access Regulations or who possesses an exemption under Section 56 of the Controlled Drug and Substances Act. The designated grower must possess, on behalf of the particular patient, a Designation-Person Production License to produce marihuana under the Marihuana Medical Access Regulations or an Exemption for cultivation or production under section 56 of the Controlled Drugs and Substances Act. With the exception of the cost of seeds purchased from Health Canada, expenses incurred by authorized users to grow their own marihuana will not be eligible under the METC. This amendment applies to the 2005 and subsequent taxation years.

Clause 6

Credit for Impairment in Physical or Mental Functions

ITA
118.3(1)

Section 118.3 of the Act provides a tax credit, generally referred to as the Disability Tax Credit (DTC), for individuals who have a severe and prolonged mental or physical impairment.

In April 2003, the Technical Advisory Committee on Tax Measures for Persons with Disabilities was established with a mandate to provide advice to the Ministers of Finance and National Revenue on how to address issues related to tax measures for persons with disabilities. In its final report, Disability Tax Fairness, issued in December 2004, the Committee made several recommendations regarding the eligibility criteria for the disability tax credit. Based on this advice, a number of amendments are being made to the DTC to respond to the Committee's suggestions. These amendments are intended to:

• Clarify the legislation with respect to how impairments are conceptualized.
• Align the legislative criteria for impairments in mental functions with wording used in the administration of these provisions.
• Extend eligibility to include individuals with multiple restrictions where the cumulative effect of those restrictions is equivalent to a marked restriction in a single basic activity of daily living.
• Better define the activities that constitute life-sustaining therapy.
• Add to the list of health practitioners who can certify eligibility for the DTC.

Credit for impairment in physical or mental functions

ITA
118.3(1)

Subsection 118.3(1) of the Act provides the formula for calculating the tax credit and the conditions for entitlement to the credit for those with a mental or physical impairment.

ITA
118.3(1)(a)

Currently, the DTC eligibility criteria require that a person have a "severe and prolonged mental or physical impairment." In its report, the Technical Advisory Committee expressed concerns with this wording. Based on the Committee's advice, this subsection is amended to replace the present wording of "severe and prolonged mental or physical impairment" with the wording "severe and prolonged impairment in physical or mental functions." As indicated by the Committee, the intent of this measure is to clarify the existing legislation and not to expand eligibility for the DTC.

This amendment applies to the 2005 and subsequent taxation years.

ITA
118.3(1)(a.1) to (a.3)

Paragraphs 118.3(1)(a.1) and (a.2) of the Act provide various conditions that must be met to be eligible for the DTC.

Paragraph 118.3(1)(a.1) of the Act, which currently applies only in respect of individuals with severe and prolonged impairments in mental or physical functions who have impairments the effects of which are to markedly restrict an individual's ability to perform a basic activity of daily living (or would be to so markedly restrict the individual's ability to perform a basic activity of daily living but for certain life sustaining therapy) is amended to also apply in respect of individuals with severe and prolonged impairments in mental or physical functions who have significant (but not marked) restrictions in more than one basic activity of daily living, if the cumulative effect of the restrictions is equivalent to having a single marked restriction in one basic activity of daily living.

Paragraph 118.3(1)(a.2) sets out the types of medical practitioners that are eligible to certify the effects of various impairments. Paragraph 118.3(1)(a.2) is amended to apply only in respect of individuals with severe and prolonged impairments in mental or physical functions who have impairments the effects of which are to markedly restrict an individual's ability to perform a basic activity of daily living (or would be to markedly restrict the individual's ability to perform a basic activity of daily living but for certain life supporting therapy) and to allow physiotherapists to certify a marked restriction in walking for the purposes of determining eligibility for the DTC.

The medical practitioners that can certify severe and prolonged impairments in mental or physical functions the effects of which are significant (but not marked) restrictions in more than one basic activity of daily living, if the cumulative effect of the restrictions is equivalent to having a single marked restriction in one basic activity of daily living, are set out in new paragraph 118.3(1)(a.3).

New paragraph 118.3(1)(a.3) is added with respect to the certification of eligibility for the DTC as a result of the cumulative effects of multiple restrictions (i.e., severe and prolonged impairments in mental or physical functions the effects of which are significant (but not marked) restrictions in more than one basic activity of daily living, if the cumulative effect of the restrictions is equivalent to having a single marked restriction in one basic activity of daily living). A medical doctor must make such certifications, unless the multiple restrictions pertain only to walking, feeding, or dressing, in which case certification may also be made by an occupational therapist.

These amendments apply to the 2005 and subsequent taxation years except that, in the case of certifications made by a physiotherapist, the amendment applies only to certifications made after February 22, 2005.

Time spent on therapy

ITA
118.3(1.1)

Subsection 118.3(1)(a.1) of the Act extends eligibility for the DTC to individuals who would be markedly restricted in their ability to perform a basic activity of daily living but for therapy administered to them, at least three times each week for a total duration averaging not less than 14 hours per week, in order to sustain one of their vital functions. The purpose of these provisions, which are generally referred to as the life-sustaining therapy provisions, is to allow individuals to be eligible for the DTC if, but for life-sustaining therapy that requires them to dedicate a significant amount of time away from their normal, everyday activities to receive the therapy, they would have impairments the effects of which would markedly restrict their ability to perform a basic activity of daily living. In its report, the Technical Advisory Committee raised concerns as to what activities constitute therapy under the DTC provisions.

In response to the committee's concerns, new subsection 118.3(1.1) is added to the Act to define the activities that will be included in determining time spent receiving therapy for the purpose of paragraph 118.3(1)(a.1). Specifically, new subsection 118.3(1.1) specifies that the time spent on administering therapy

• includes only time dedicated to the therapy-that is, the individual has to take time away from normal, everyday activities in order to receive the therapy,
• includes, in the case of therapy that requires a regular dosage of medication that needs to be adjusted on a daily basis, the activities directly involved in determining the appropriate dosage, but does not include time spent on activities related to a dietary or exercise restrictions or regime (even if these restrictions or regimes are a factor in determining the daily dosage of medication),
• does not include travel time, medical appointments, shopping for medication or recuperation after therapy, and
• includes, in the case of a child who is unable to perform the activities related to the therapy as a result of the child's age, the time spent by the child's primary caregivers (usually the parents) in performing or supervising these activities for the child.

With these proposed changes, it is expected that children with very severe cases of Type 1 diabetes-who require many insulin injections (which requires knowledge of current blood sugar levels at the time of each injection), as well as several additional blood sugar tests to monitor their condition-will become eligible for the DTC.

The life-sustaining therapy provisions, in and of themselves, do not extend eligibility for the DTC to individuals who receive therapy in a manner that does not significantly affect their everyday activities (for example, by means of a portable or implanted device).

New subsection 118.3(1.1) applies to the 2005 and subsequent taxation years.

Clause 7

Nature of Impairment

ITA
118.4(1)(b.1)

Section 118.4 of the act sets out circumstances in which an individual is considered to have a severe and prolonged impairment for the purposes of the DTC.

Based on the advice of the Technical Advisory Committee, eligibility for the DTC is extended to individuals with severe and prolonged impairments in mental or physical functions who have significant restrictions in more than one basic activity of daily living if the cumulative effect of their restrictions is equivalent to having a single marked restriction in one basic activity of daily living.

New paragraph 118.4(b.1) describes the circumstances where an individual with significant restrictions in more than one basic activity of daily living will be considered to have the equivalent of a single marked restriction. Such an individual will be considered to have the equivalent of a marked restriction in a basic activity of daily living only where, even with therapy and the use of appropriate devices and medication, the individual's ability to perform more than one basic activity of daily living is significantly restricted. These multiple restrictions, taken together, must be present all or substantially all of the time. In other words, while each of these restrictions on its own would not markedly restrict a specific basic activity of daily living, when taken together, the restrictions must have an effect equivalent to that of a marked restriction in a single activity. While not a basic activity of daily living, a visual impairment that cannot be mitigated by means of eyeglasses or other visual aids will be considered in conjunction with restrictions in the other basic activities of daily living in determining the cumulative effects of one or more impairments.

An example of an individual who could become eligible for the DTC under this change is someone with multiple sclerosis who continuously experiences fatigue, depressed mood and balance problems.

New paragraph 118.4(b.1) applies to the 2005 and subsequent taxation years.

ITA
118.4(1)(c) and (c.1)

Individuals with severe impairments in mental functions are eligible for the disability tax credit (DTC) if they have a marked restriction in "perceiving, thinking and remembering," which is one of the basic activities of daily living. The Technical Advisory Committee noted that the language currently used by the Canada Revenue Agency on Form T2201, Disability Tax Credit Certificate, to explain the meaning of "perceiving, thinking and remembering" provides a clearer description of the effects of impairments in mental functions. Accordingly, paragraph 118.4(1)(c) of the Act is amended to replace the expression "perceiving, thinking and remembering" with the expression "mental functions necessary for everyday life".

New paragraph 118.4(1)(c.1) is added to the Act, for greater certainty, to define mental functions necessary for everyday life. These mental functions include

• memory - which refers to the ability to remember the following: simple instructions; basic personal information such as name and address; or material of importance or interest,
• problem-solving, goal-setting and judgement (taken together) - which refers to the ability to solve problems, set and keep goals, and make appropriate decisions and judgements, and
• adaptive functioning - which refers to refers to abilities related to self-care, health and safety, social skills and common, simple transactions.

These amendments apply to the 2005 and subsequent taxation years.

Reference to medical practitioners, etc.

ITA
118.4(2)

Subsection 118.4(2) of the Act provides a definition of the group of health professionals to whom various references in section 63 (relating to childcare expenses), section 118.2 (referring to medical expenses) section 118.3 (relating to the DTC) and section 118.6 (relating to the education tax credit) of the Act apply.

This provision is amended as a consequence of the introduction of section 64 - the disability supports deduction, applicable to the 2004 and subsequent taxation years.

This provision is further amended, applicable after February 22, 2005, consequential to the amendment to paragraph 118.3(1)(a.2) which makes a physiotherapist eligible to certify, after that date, a severe and prolonged impairment in walking.

Clause 8

Ordering of Credits

ITA
118.92

Section 118.92 of the Act provides that the tax credits allowed in computing an individual's tax payable are to be applied in a specific order.

This section is amended to add a reference to new section 118.01, the adoption expense tax credit.

This amendment applies to the 2005 and subsequent taxation years.

Credits in Separate Returns

ITA
118.93

Section 118.93 of the Act provides that, where a separate return of income for an individual is filed under subsection 70(2), 104(23) or 150(4) for a period and another return under Part I is filed for a period ending in the calendar year in which the period covered in the separate return ends, the combined amounts deducted in respect of the pension, charitable donation, medical expenses, impairment in mental or physical functions, tuition fees and education credits and the transfer of unused credits to a supporting person (but not to a spouse) cannot exceed the amount that would be deducted under those provisions if no separate return were filed.

This section is amended to add a reference to new section 118.01, the adoption expense tax credit.

This amendment applies to the 2005 and subsequent taxation years.

Tax Payable by Non-resident

ITA
118.94

Section 118.94 of the Act provides rules with respect to non-refundable tax credits allowed to individuals who did not reside in Canada at any time in a taxation year. Subject to the special rule in section 217 of the Act, such individuals are allowed to claim certain non-refundable credits only where all or substantially all (90%) of their income for the year is included in computing their taxable income earned in Canada.

This section is amended to add a reference to new section 118.01, the adoption expense tax credit.

This amendment applies to the 2005 and subsequent taxation years.

Clause 9

Credits in Year of Bankruptcy

ITA
118.95

When an individual becomes bankrupt, subsection 128(2) of the Act divides the calendar year in which the bankruptcy occurs into two taxation years: one that runs from January 1 to the day before the bankruptcy; and a second that begins on the day of the bankruptcy and runs to December 31. Section 118.95 of the Act ensures that non-refundable tax credits that are based on expenditures or the receipt of certain types of income are determined by reference to the amounts that relate to the relevant taxation year. In all cases, the total of the amounts claimed in respect of each of the credits for the two taxation years cannot be greater than the amount that could be claimed in respect of the calendar year as a whole.

The amendment to paragraph 118.95(a) adds a reference to new section 118.01, the adoption expense tax credit and ensures that, in the year of bankruptcy, this credit will be claimed on the tax return for the taxation year in which the adoption period (as defined in section 118.01) ends.

This amendment applies to the 2005 and subsequent taxation years.

Clause 10

Where Individual Bankrupt

ITA
128(2)(e)

Subsection 128(2) of the Act contains a number of special rules that apply in cases of personal bankruptcy.

Paragraph 128(2)(d) divides the calendar year in which an individual becomes bankrupt into two taxation years. The first taxation year runs from January 1 to the day before bankruptcy and the second taxation year begins on the day of bankruptcy and runs to December 31.

Paragraph 128(2)(e) requires a trustee in bankruptcy to file, for each taxation year in the calendar year in which an individual becomes bankrupt, an income tax return with respect to certain income of the estate and businesses of the individual. For this purpose, the individual's income is to be determined as if no deductions other than those specifically listed were available to the individual.

Paragraph 128(2)(e) is amended to add a reference to new section 118.01, the adoption expense tax credit. This means that the adoption expense tax credit will be claimed on the tax return for the taxation year in which the adoption period (as defined in section 118.01) ends.

This amendment applies to the 2005 and subsequent taxation years.

Clause 11

Deduction in Computing Income

ITA
135(1)

Subsection 135(1) of the Act allows a taxpayer to deduct from income payments made to customers pursuant to allocations in proportion to patronage. Subsection 135(1) is amended as a consequence of the addition of the new rules in section 135.1 relating to the payment of tax-deferred patronage dividends by agricultural cooperative corporations. In particular, subsection 135(1) is amended to provide that subsection (1) is subject to the deductibility limit in new subsection 135.1(3).

This amendment applies after 2005.

Amount to be Deducted or Withheld From Payment to Customer

ITA
135(3)

Subsection 135(3) of the Act provides that most payments made pursuant to allocations in proportion to patronage are subject to a withholding of 15% on account of the recipient's income tax liability. Subsection 135(3) is amended as a consequence of the addition of the new rules in section 135.1 relating to the payment of tax-deferred patronage dividends by agricultural cooperative corporations. In particular, subsection 135(3) is amended to provide that subsection 135(3) is subject to the exclusion from the withholding obligation set out in new subsection 135.1(6).

This amendment applies after 2005.

Definitions

ITA
135(4)

Subsection 135(4) of the Act is amended to provide that the definitions set out in subsection 135(4) also apply for the purposes of new section 135.1 relating to the payment of tax-deferred patronage dividends by agricultural cooperative corporations.

This amendment applies after 2005.

Payment to Customer to be Included in Income

ITA
135(7)

Subsection 135(7) of the Act provides that a taxpayer must include in income a payment pursuant to an allocation in proportion to patronage (other than an allocation in respect of consumer goods or services) in the taxation year in which the payment was received. Subsection 135(7) is amended as a consequence of the addition of the new rules in section 135.1 relating to the payment of tax-deferred patronage dividends by agricultural cooperative corporations. In particular, subsection 135(7) is amended to provide that subsection 135(7) is subject to the income inclusion rule in new subsection 135.1(2).

This amendment applies after 2005.

Clause 12

Agricultural Cooperatives - Tax-Deferred Patronage Dividends

ITA
135.1

New section 135.1 of the Act provides that an eligible member of an agricultural cooperative corporation may defer the inclusion in income of all or a portion of a payment, made by an agricultural cooperative corporation, in the form of a tax deferred cooperative share, pursuant to an allocation in proportion to patronage. This deferral lasts until the disposition (or deemed disposition) of the share. Unless otherwise indicated, the provisions of new section 135.1 apply after 2005.

Definitions

ITA
135.1(1)

New subsection 135.1(1) of the Act defines a number of terms for the purposes of new section 135.1 and section 135.

"Agricultural business" is defined to mean a business, carried on in Canada, that consists of (i) farming (including, if the person carrying on the business is a cooperative corporation, the production, processing, storing and wholesale marketing, of the products of its members' farming activities), or (ii) the provision of goods or services (other than financial services) that are required for farming.

An example of the provision of goods required for farming is the sale of livestock feed and supplements. An example of the provision of a service required for farming is grain marketing services.

"Agricultural cooperative corporation"

"Agricultural cooperative corporation" is defined to mean at any time a cooperative corporation that meets either (or both) of two tests. The first test is met if the cooperative corporation's principal business is an agricultural business. The second test is met if at least 75% of the cooperative corporation's members are themselves agricultural cooperative corporations or have as their principal business a farming business.

"Allowable disposition"

"Allowable disposition" is defined to mean certain dispositions by a taxpayer of a tax deferred cooperative share that take place less than 5 years after the day on which the share was issued. A disposition within that time is an allowable disposition if, before the disposition, the agricultural cooperative corporation is notified in writing that the taxpayer has become disabled and permanently unfit for work, or terminally ill. It will also be an allowable disposition if the taxpayer has ceased to be a member. Lastly, a disposition is an allowable disposition if the agricultural cooperative corporation is notified in writing that the share is held by a person on whom the share has devolved as a consequence of the death of the taxpayer.

The term "allowable disposition" is relevant for the definition of a tax deferred cooperative share. One of the conditions to qualify as a tax deferred cooperative share is that a term of the share must provide that the agricultural cooperative corporation cannot, otherwise than pursuant to an allowable disposition, redeem, acquire or cancel the share within 5 years its issuance.

"Eligible member"

"Eligible member", of an agricultural cooperative corporation, is defined to mean a member who carries on an agricultural business and who is an individual resident in Canada, an agricultural cooperative corporation, a corporation resident in Canada that carries on the business of farming in Canada, or a partnership that carries on the business of farming in Canada, all of the members of which are eligible members.

"Tax deferred cooperative share"

"Tax deferred cooperative share" is defined, at any time, to mean a share that meets certain conditions.

• First, the share must be issued, after 2005 and before 2016, by an agricultural cooperative corporation to an eligible member, and pursuant to an allocation in proportion to patronage.
• Second, the holder of the share cannot be entitled to receive on the redemption, cancellation or acquisition of the share by the agricultural cooperative corporation (or by any person with whom the agricultural cooperative corporation does not deal at arm's length) an amount that is greater than the amount that would, if the Act were read without reference to new section 135.1, be included under subsection 135(7) of the Act in computing the eligible member's income for their taxation year in which the share was issued.
• Third, new subsection (4) must not have applied before that time to treat the share as having been disposed of. The share will be deemed to have been disposed of by subsection (4) at the earliest time at which either (i) the paid-up capital of the share is reduced otherwise than by way of a redemption of the share, or (ii) the taxpayer pledges, assigns or in any way alienates the share as security for indebtedness of any kind.
• Fourth, the share must be of a class the terms of which provide that the agricultural cooperative corporation shall not, otherwise than pursuant to an allowable disposition, redeem, acquire or cancel a share of the class within 5 years after it was issued.
• Fifth, the agricultural cooperative corporation must, in prescribed form and manner, identify the class of shares as being tax deferred cooperative shares. It is expected that Regulation 218 will be amended to provide in more detail for the reporting obligation that this imposes on the agricultural cooperative corporation.

"Tax paid balance"

The "tax paid balance" of a taxpayer at the end of a particular taxation year is essentially the total amount, in respect of tax deferred cooperative shares, that the taxpayer has included in income for that year and previous years. Specifically, the balance is defined to mean the amount, if any, by which the total of the taxpayer's tax paid balance at the end of the immediately preceding taxation year and the amount that the taxpayer has elected to include in income under subparagraph (2)(a)(ii) exceeds the total of the taxpayer's proceeds of disposition on tax deferred cooperative shares disposed of in the taxation year.

Income Inclusion

ITA
135.1(2)

New subsection 135.1(2) of the Act limits the amount, in respect of tax deferred cooperative shares, that is included in a taxpayer's income for a taxation year. The subsection provides that in computing the income of a taxpayer under Part I of the Act for a particular taxation year, the amount that shall be included under subsection 135(7), in respect of the taxpayer's receipt, as an eligible member, of a tax deferred cooperative share of an agricultural cooperative corporation in the particular taxation year is only the total of:

(a) the lesser of (i) the amount that would, if the Act were read without reference to section 135.1, have been included in income under subsection 135(7) and (ii) the amount, if any, specified by the taxpayer in an election, and

(b) the amount, if any, by which (i) the taxpayer's proceeds of disposition on tax deferred cooperative shares disposed of in the particular taxation year exceeds (ii) the total of the taxpayer's tax paid balance at the end of the immediately preceding taxation year, and the amount that the taxpayer has elected to include in income under subparagraph (2)(a)(ii).

The effect of subsection 135.1(2) is that if no election is made to include in income some portion of the amount that would otherwise be included in respect of having been issued a tax deferred cooperative share the inclusion in income will be deferred until the disposition (or deemed disposition) of the share. The election provided in paragraph 135.1(2)(a) is thus not to defer the inclusion of the amount in income but rather to include the amount in income for the particular taxation year.

Deductibility Limit

ITA
135.1(3)

Subsection 135(1) of the Act allows a taxpayer to deduct from income payments made to customers pursuant to allocations in proportion to patronage. New subsection 135.1(3) restricts the amount that may be deducted under subsection 135(1) by an agricultural cooperative corporation for a particular taxation year in respect of payments, in the form of tax deferred cooperative shares, made pursuant to allocations in proportion to patronage. The restriction is that the deducted amount may not exceed 85% of the agricultural cooperative corporation's income of the taxation year attributable to business done with members. The term "income of the taxpayer attributable to business done with members" as defined in subsection 135(4) is intended to apply to this calculation.

Deemed Disposition

ITA
135.1(4)

New subsection 135.1(4) of the Act provides that a taxpayer who holds a tax deferred cooperative share is treated as having disposed of the share at the earliest time at which (i) the paid-up capital of the share is reduced (otherwise than by way of a redemption of the share), or (ii) the taxpayer pledges, assigns or in any way alienates the share as security for indebtedness of any kind. If the subsection applies, the tax deferred cooperative share is considered to have been disposed of for proceeds of disposition equal to the amount that would otherwise have been included under subsection 135(7), in respect of the share, in computing the taxpayer's income for the taxation year in which the share was issued.

As a result of the deemed disposition, any deferral of the inclusion in income of the patronage dividend received as a tax deferred cooperative share will end.

This amendment applies after 2005 except that new paragraph 135.1(4)(b) of the Act does not apply to indebtedness entered into before 2006.

Reacquisition

ITA
135.1(5)

New subsection 135.1(5) of the Act provides that a taxpayer who is treated by subsection (4) to have disposed at any time of a tax deferred cooperative share is considered to have reacquired the share, immediately after that time, at a cost equal to the taxpayer's proceeds of disposition from that disposition.

Exclusion from Withholding Obligation

ITA
135.1(6)

Existing subsection 135(3) of the Act requires that amounts be withheld from most patronage dividends (payments made pursuant to allocations in proportion to patronage), on account of the recipient's tax liability. New subsection 135.1(6) provides that subsection 135(3) does not apply to a patronage dividend that is paid by an agricultural cooperative corporation through the issuance of a tax deferred cooperative share.

Withholding on Redemption

ITA
135.1(7)

New subsection 135.1(7) of the Act applies a withholding requirement in respect of any share that was at the time it was issued, a tax deferred cooperative share of an agricultural cooperative corporation. The new subsection provides that if the share is redeemed, acquired or cancelled by the agricultural cooperative corporation, or by a person or partnership with whom it does not deal at arm's length, that cooperative or person or partnership must withhold and forthwith remit to the Receiver General, on account of the shareholder's tax liability, 15% from the amount otherwise payable on the redemption, acquisition or cancellation. It is expected that Regulation 218 will be amended to provide in more detail for the reporting obligation that this imposes on the agricultural cooperative corporation.

Application of Subsections 84(2) and (3)

ITA
135.1(8)

New subsection 135.1(8) of the Act provides that the deemed dividend provisions in subsections 84(2) and (3) do not apply to a tax deferred cooperative share. In general, subsections 84(2) and (3) provide that paid-up capital can be returned to a shareholder free of tax, on the winding-up of a corporation or its redemption, acquisition or cancellation of its shares, but that any excess is treated as a dividend.

This amendment applies after 2005.

Clause 13

Definition of "Cooperative Corporation"

ITA

136(2)

Subsection 136(2) of the Act defines "cooperative corporation" for the purpose of section 136. Subsection 136(2) is amended to clarify the drafting and to provide that a corporation that is continued, in addition to one that is incorporated, as a cooperative corporation will be included in the definition.

This amendment applies after June 2005.

Clause14

Payments by Trustees, etc

ITA
227(5)

Subsection 227(5) of the Act provides that a person who has influence over the property or affairs of another person and who authorises or causes certain payments to be made by the other person that are subject to deductions at source, is deemed to have made the payment and is jointly and severally, or solidarily, liable with the other person for any amount payable under the Act in respect of these payments and for any amount payable in respect of the failure to deduct and remit the amount payable under the Act. The subsection is amended as a consequence of the addition of the new rules in section 135.1 relating to the payment of tax-deferred patronage dividends by agricultural cooperative corporations. In particular, subsection 227(5) is amended to refer to the withholding obligation on the redemption, acquisition or cancellation of a tax deferred cooperative share in subsection 135.1(7).

This amendment applies after 2005.

Interest on Amounts Not Deducted or Withheld

ITA
227(8.3)

Subsection 227(8.3) of the Act provides that a person who fails to deduct or withhold an amount, as required by a number of specified provisions, is liable for interest with respect to the amount that person fails to deduct or withhold. The subsection is amended as a consequence of the addition of the new rules in section 135.1 relating to the payment of tax-deferred patronage dividends by agricultural cooperative corporations. In particular, subsection 227(8.3) is amended to refer to the withholding obligation on the redemption, acquisition or cancellation of a tax deferred cooperative share in subsection 135.1(7).

This amendment applies after 2005.

Liability to Pay Amount Not Deducted or Withheld

ITA
227(8.4)

Subsection 227(8.4) of the Act provides that where a payor is required under subsection 135(3) to deduct or withhold any amount in respect of a payment made to another person, or is required under subsection 153(1) to deduct or withhold an amount from a payment to a non-resident person has failed to do so, the payor is liable to pay tax under the Act the whole of the amount that should have been deducted or withheld and the payor may recover from the person any such amount paid on their behalf. The subsection is amended as a consequence of the addition of the new rules in section 135.1 relating to the payment of tax-deferred patronage dividends by agricultural cooperative corporations. In particular, subsection 227(8.4) is amended to refer to the withholding obligation on the redemption, acquisition or cancellation of a tax deferred cooperative share in subsection 135.1(7).

This amendment applies after 2005.

Clause 15

Liability of Directors for Failure to Deduct

ITA
227.1(1)

Subsection 227.1(1) of the Act provides that directors of a corporation are jointly and severally, or solidarily, liable in specific circumstances for the withholding tax obligations imposed on the corporation under section 135, 153 or 215. The subsection is amended as a consequence of the addition of the new rules in section 135.1 relating to the payment of tax-deferred patronage dividends by agricultural cooperative corporations. In particular, subsection 227.1(1) is amended to refer to the withholding obligation on the redemption, acquisition or cancellation of a tax deferred cooperative share in subsection 135.1(7).

This amendment applies after 2005.