Archived - Legislative Proposals and Explanatory Notes relating to the Income Tax Act, the Excise Act, 2001 and the Excise Tax Act

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## Explanatory Notes

These explanatory notes are provided to assist in an understanding of the relevant amendments. The notes are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.

### Preface

These explanatory notes describe proposed amendments to the Income Tax Act, the Income Tax Regulations, the Excise Act, 2001, the Excise Tax Act, and the Budget Implementation Act, 2008 to implement the remaining tax measures for the Budget announced on February 26, 2008. These explanatory notes also describe proposed amendments to the Income Tax Act related to additional tax initiatives. These explanatory notes describe these proposed amendments, clause by clause, for the assistance of Members of Parliament, taxpayers and their professional advisors.

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

## Part 1 Amendments related to Income Tax

### Income Tax Act

Clause 1

Stock Options

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7

Section 7 of the Income Tax Act deals with agreements (commonly referred to as stock options) under which employees of a corporation or a mutual fund trust acquire rights to acquire securities of the employer (or a person with whom the employer does not deal at arm’s length).

Exchange of options

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7(1.4)(b)(iv)

Subsection 7(1.4) of the Act contains provisions that apply when an individual disposes of rights to acquire securities under an employee option agreement in exchange for other such rights under an agreement with a designated person (within the meaning assigned by paragraph 7(1.4)(b) of the Act). Provided certain conditions are met, subsection 7(1.4) deems the disposition not to have occurred and deems the new option to be the same as, and a continuation of, the original option.

Paragraph 7(1.4)(b) of the Act is amended in conjunction with a series of other amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. Among these amendments are the new definitions "SIFT wind-up corporation", "SIFT wind-up entity" and "SIFT wind-up entity equity" in subsection 248(1) of the Act.

The amendment to paragraph 7(1.4)(b), which adds a new subparagraph (vi), extends the concept of a designated person in that provision to include a SIFT wind-up corporation in respect of a particular SIFT wind-up entity, provided that the particular SIFT wind-up entity was a mutual fund trust at the time of the disposition of the old rights and provided that those rights were rights to acquire equity in the particular SIFT wind-up entity (i.e., rights to acquire a beneficial interest in the trust described by reference to units).

For more detail, readers may refer to the commentary on the definitions "SIFT wind-up corporation", "SIFT wind-up entity" and "SIFT wind-up entity equity" in subsection 248(1) of the Act.

This amendment applies after December 19, 2007.

Clause 2

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12

Section 12 of the Act provides for the inclusion of various amounts in computing a taxpayer’s income from business or property.

Former TFSA

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12(1)(z.5)

New paragraph 12(1)(z.5) of the Act requires that the income of a taxpayer arising from the application of new subsection 146.2(9) of the Act be included in computing the taxpayer’s income from property. That subsection, which applies on the death of the last holder of a trusteed tax-free savings account (TFSA), continues the trust’s tax-exempt status until the end of the year following the year of death. It also provides for any income earned on, or appreciation in the value of, the trust’s property during the post-death exempt period to be included, to the extent paid out during that period, in the income of the recipient and, otherwise, in the trust’s income for its first taxable year. For more details, readers may refer to the commentary on subsection 146.2(9).

This amendment applies to the 2009 and subsequent taxation years.

Definitions

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12(11)

Subsection 12(4) of the Act requires that the accrued interest on an investment contract be included in computing income on an annual basis. A number of arrangements are specifically excluded from these rules under the definition "investment contract" in subsection 12(11) of the Act.

The definition "investment contract" is amended to add tax-free savings accounts (TFSAs) to the list of exclusions. This will ensure that a TFSA that is issued as a deposit will not be subject to the interest accrual rules.

This amendment applies to the 2009 and subsequent taxation years.

Clause 3

Insurer’s Reserve Inclusion

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12.5

New section 12.5 of the Income Tax Act (the "Act") provides transitional rules for insurers in respect of their insurance businesses (other than life insurance businesses) as a result of changes to accounting rules.

New section 12.5 applies in conjunction with the provisions of new section 20.4 of the Act. Similar changes in respect of insurers’ life insurance businesses are proposed in section 138 of the Act. These rules are intended to ensure that any increase or decrease in the reserves of an insurer resulting from these accounting changes will be taken into account in computing income for tax purposes over a five-year period.

Rules are also introduced to treat these five-year transitional amounts appropriately if, during the transitional period, an insurer transfers its assets to another entity. More particularly, the transferee corporation will be treated as a continuation of the transferor for the purposes of the five-year transition amounts. If an insurer ceases to carry on a business, the recognition of the five-year transition period is generally accelerated to the time at which that business ceases to be carried on.

For further details, readers may refer to the commentary to proposed sections 20.4 and 142.51 of the Act and proposed amendments to section 138 of the Act and Part XIV of the Income Tax Regulations (the "Regulations").

Definitions

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12.5(1)

New subsection 12.5(1) of the Act contains definitions that apply for the purposes of new section 12.5. These definitions also apply for the purposes of section 20.4 of the Act.

The definitions in subsection 12.5(1) apply to taxation years that begin on or after October 1, 2006.

"base year"

The new definition "base year" provides that the base year of an insurer is the insurer’s taxation year that immediately precedes its transition year.

Sections 12.5 and 20.4 apply in respect of an insurance business other than a life insurance business. "Insurance business" for these purposes therefore means an insurance business carried on by the insurer, other than a life insurance business.

"reserve transition amount"

The "reserve transition amount"of an insurer for the insurer’s transition year in respect of an insurance business (other than a life insurance business) carried on by it in Canada in that year is the positive or negative amount determined by the formula A-B.

If the formula gives rise to a positive amount in respect of an insurer’s insurance business, the insurer is required by subsection 12.5(2) of the Act to include the amount in computing its income for its transition year from that business. If, instead, the amount is a negative amount, the insurer is required by subsection 20.4(2) to deduct the amount in computing its income from the insurance business for the transition year.

Element A of the formula is the maximum amount that the insurer would be permitted to claim under paragraph 20(7)(c) of the Act (and that would be prescribed by section 1400 of the Regulations for the purpose of that paragraph) as a policy reserve for the base year of the insurer in respect of its insurance policies, if

• the generally accepted accounting principles that applied to the insurer in valuing its assets and liabilities for its transition year had applied to the insurer for its base year, and
• section 1400 of the Regulations were read in respect of the insurer’s base year as it reads in respect of its transition year.

Element B of the formula is the maximum amount that the insurer is permitted to claim under paragraph 20(7)(c) as a policy reserve for its base year.

"transition year"

The new definition "transition year" provides that an insurer’s transition year is its first taxation year that begins after September 30, 2006.

Transition year income inclusion

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12.5(2)

New subsection 12.5(2) of the Act includes in computing an insurer’s income for its transition year from an insurance business (other than a life insurance business) carried on by it in Canada in that year, the positive amount, if any, of the insurer’s reserve transition amount for its transition year in respect of that insurance business.

Subsection 12.5(2) operates in conjunction with new subsection 20.4(3) of the Act. In general terms, if an insurer has included an amount under subsection 12.5(2), subsection 20.4(3) provides for a corresponding deduction – recognized over a 5-year period beginning with years that end after the start of its transition year – in computing the insurer’s income from that business.

For further details, readers may refer to the commentary on subsection 20.4(3) and the new definitions "reserve transition amount" and "transition year" in subsection 12.5(1) of the Act.

New subsection 12.5(2) applies to taxation years that begin on or after October 1, 2006.

Transition year income deduction reversal

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12.5(3)

New subsection 12.5(3) of the Act requires that an insurer include an amount in income in respect of an insurance business if the insurer has deducted an amount under subsection 20.4(2) of the Act in computing its income for its transition year from that business. The amount to be included by the insurer, for each of its particular taxation years that ends after the start of its transition year, in computing its income from that insurance business, is the amount determined by the formula

A x B/1825

where

A is the amount deducted under subsection 20.4(2) in computing the insurer’s income for the transition year from that insurance business, and

B is the number of days in the particular taxation year that are before the day that is 1825 days after the first day of the transition year.

For further details, readers may refer to the commentary to subsection 20.4(2) and the definitions "reserve transition amount" and "transition year" in subsection 12.5(1) of the Act.

New subsection 12.5(3) applies to taxation years that begin on or after October 1, 2006.

Winding-up

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12.5(4)

New subsection 12.5(4) of the Act is one of a series of special rules contained in subsections 12.5(4) to (9) and 20.4(4) of the Act and that provide for the appropriate treatment of an insurer’s reserve transition amounts in circumstances in which the insurer or its business, as the case may be, has been transferred, reorganized or ended.

Subsection 12.5(4) applies in the circumstances of a wind-up of the insurer corporation into its parent. Specifically, subsection 12.5(4) applies if an insurer has, in a winding-up to which subsection 88(1) of the Act has applied, been wound-up into its parent corporation, and immediately after the winding-up the parent carries on an insurance business. In these circumstances, subsection 12.5(4) set outs a series of continuity rules for applying subsections 12.5(3) and 20.4(3) of the Act in computing the insurer’s income and that of the parent for particular taxation years that end on or after the first day (the "start day") on which assets of the insurer were distributed to the parent on the winding-up. These continuity rules ensure that in so applying those provisions:

• the parent is, on and after the start day, deemed to be the same corporation as and a continuation of the insurer in respect of
• any amount included under subsection 12.5(2) of the Act or deducted under subsection 20.4(2) of the Act in computing the insurer’s income from an insurance business for its transition year,
• any amount included under subsection 12.5(3) or deducted under subsection 20.4(3) in computing the insurer’s income from an insurance business for a taxation year of the insurer that begins before the start day, and
• any amount that — in the absence of subsection 12.5(4) and assuming that the insurer carries on an insurance business on each day (that is the start day or a subsequent day) that the parent carries on an insurance business — would be required to be included or deducted, in respect of any of those days, under subsection 12.5(3) or 20.4(3) in computing the insurer’s income from an insurance business; and
• the insurer is, in respect of each of its particular taxation years, to determine the value for B in the formulas in subsection 12.5(3) and 20.4(3) without reference to the start day and days after the start day.

New subsection 12.5(4) applies to taxation years that begin on or after October 1, 2006.

Amalgamations

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New subsection 12.5(5) of the Act is one of a series of special rules, contained in subsections 12.5(4) to (9) and 20.4(4) of the Act, that provide for the appropriate treatment of an insurer’s reserve transition amounts in circumstances in which the insurer or its business, as the case may be, has been transferred, reorganized or ended.

Subsection 12.5(5) applies if there is an amalgamation (within the meaning assigned by subsection 87(1) of the Act) of an insurer with one or more other corporations to form a new corporation, and immediately after the amalgamation the new corporation carries on an insurance business. In these circumstances, subsection 12.5(5) set outs a series of continuity rules for applying subsections 12.5(3) and 20.4(3) of the Act in computing the income of the new corporation for its taxation years that begin on or after the day on which the amalgamation occurred. These continuity rules ensure that in applying those provisions the new corporation is, on and after the day on which the amalgamation occurred, deemed to be the same corporation as and a continuation of the insurer in respect of:

• any amount included under subsection 12.5(2) of the Act or deducted under subsection 20.4(2) of the Act in computing the insurer’s income from an insurance business for its transition year;
• any amount included under subsection 12.5(3) or deducted under subsection 20.4(3) in computing the insurer’s income from an insurance business for a taxation year of the insurer that begins before the day on which the amalgamation occurred; and
• any amount that — in the absence of subsection 12.5(5) and assuming that the insurer carries on an insurance business on each day (that is the day on which the amalgamation occurred or a subsequent day) that the new corporation carries on an insurance business — would be required to be included or deducted, in respect of any of those days, under subsection 12.5(3) or 20.4(3) in computing the insurer’s income from an insurance business.

New subsection 12.5(5) applies to taxation years that begin on or after October 1, 2006.

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12.5(6) & (7)

New subsections 12.5(6) and (7) of the Act are part of a series of special rules, contained in subsections 12.5(4) to (9) and 20.4(4) of the Act, that provide for the appropriate treatment of an insurer’s reserve transition amounts in circumstances in which the insurer or its business, as the case may be, has been transferred, reorganized or ended.

Under subsection 12.5(6), subsection 12.5(7) will apply if, at any time,

• an insurer (the "transferor") transfers, to a related corporation (the "transferee"), property in respect of an insurance business carried on by the transferor in Canada (the "transferred business") and
• either
• subsection 138(11.5) or (11.94) of the Act applies to the transfer, or
• subsection 85(1) of the Act applies to the transfer, the transfer includes all or substantially all of the property and liabilities of the transferred business and, immediately after the transfer, the transferee carries on an insurance business.

If these conditions are met, subsection 12.5(7) applies in respect of the property transfer. The effects of applying the subsection are that:

• the transferee is, at and after that time, deemed to be the same corporation as and a continuation of the transferor in respect of
• any amount included under subsection 12.5(2) of the Act or deducted under subsection 20.4(2) of the Act in computing the transferor’s income for its transition year that can reasonably be attributed to the transferred business,
• any amount included under subsection 12.5(3) of the Act or deducted under subsection 20.4(3) of the Act in computing the transferor’s income for a taxation year of the transferor that begins before that time that can reasonably be attributed to the transferred business, and
• any amount that, in the absence of subsection 12.5(7) — and assuming that the transferor carries on an insurance business on each day (that includes that time or is a subsequent day) that the transferee carries on an insurance business — would be required to be included or deducted, in respect of any of those days, under subsection 12.5(3) or 20.4(3) in computing the transferor’s income that can reasonably be attributed to the transferred business, and
• in determining, in respect of the day that includes that time or any subsequent day, any amount that is required under subsection 12.5(3) or 20.4(3) to be included or deducted in computing the transferor’s income for each particular taxation year from the transferred business, the description of A in the formulas in those subsections is deemed to be nil.

New subsections 12.5(6) and (7) apply to taxation years that begin on or after October 1, 2006.

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12.5(8)

New subsection 12.5(8) of the Act is one of a series of special rules, contained in subsections 12.5(4) to (9) and 20.4(4) of the Act, that provide for the appropriate treatment of an insurer’s reserve transition amounts in circumstances in which the insurer or its business, as the case may be, has been transferred, reorganized or ended.

Subsection 12.5(8) applies if at a particular time an insurer ceases to carry on all or substantially all of an insurance business (the "discontinued business"), and none of the special continuity rules contained in subsections 12.5(4) to (6) of the Act apply to that cessation. In these circumstances, subsection 12.5(8) requires that the insurer include — in computing its income from the discontinued business for its taxation year that includes the time that is immediately before the particular time — the amount determined by the formula A – B set out in that subsection.

Element A in the formula is the amount deducted under subsection 20.4(2) of the Act in computing the insurer’s income from the discontinued business for its transition year. Element B in the formula is the total of all amounts each of which is an amount included under subsection 12.5(3) of the Act in computing the insurer’s income from the discontinued business for a taxation year that began before the particular time.

Readers may also refer to the commentary on subsections 12.5(9) and 20.4(4) of the Act.

New subsection 12.5(8) applies to taxation years that begin on or after October 1, 2006.

Ceasing to exist

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12.5(9)

New subsection 12.5(9) of the Act applies in conjunction with subsections 12.5(8) and 20.4(4) of the Act. Subsection 12.5(9) is one of a series of special rules, contained in subsections 12.5(4) to (9) of the Act, that provide for the appropriate treatment of an insurer’s reserve transition amounts in circumstances in which the insurer or its business, as the case may be, has been transferred, reorganized or ended.

New subsection 12.5(9) applies in circumstances in which an insurer that carried on an insurance business (other than a life insurance business) ceases to exist at any time, unless the insurer ceased to exist because of a winding-up or amalgamation described in subsection 12.5(4) or (5) of the Act. Subsection 12.5(9) provides that, for the purposes of subsections 12.5(8) and 20.4(4) of the Act, the insurer is deemed to have ceased to carry on the insurance business at the earlier of

• the time at which the insurer actually ceased to carry on the insurance business, and
• the time that is immediately before the end of the last taxation year of the insurer that ended at or before the time at which the insurer ceased to exist.

New subsection 12.5(9) applies to taxation years that begin on or after October 1, 2006.

Clause 4

Insurer’s Reserve Deduction

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20.4

New section 20.4 of the Act provides transitional rules for insurers in respect of their insurance businesses (other than life insurance businesses) as a result of changes to accounting rules.

New section 20.4 applies in conjunction with new section 12.5 of the Act. Similar changes applicable to insurers in respect of their life insurance businesses are proposed in section 138 of the Act. These rules are intended to ensure that any increase or decrease in the reserves of an insurer resulting from these accounting changes will be taken into account in computing income for tax purposes over a five-year period.

For further details, readers may refer to the commentary to proposed sections 12.5 and 142.51 of the Act and proposed amendments to section 138 of the Act and Part XIV of the Regulations.

Definitions

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20.4(1)

New subsection 20.4(1) of the Act provides that the definitions in subsection 12.5(1) of the Act apply for the purposes of section 20.4. Subsection 12.5(1) defines the expressions "base year", "insurance business", "reserve transition amount" and "transition year" used in section 20.4. For more detail, readers may refer to the commentary on those definitions.

New subsection 20.4(1) applies to taxation years that begin on or after October 1, 2006.

Transition year income deduction

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20.4(2)

New subsection 20.4(2) of the Act provides that there is to be deducted in computing an insurer’s income for its transition year from an insurance business (other than a life insurance business) carried on by it in Canada in that year, the absolute value of the negative amount, if any, of the insurer’s reserve transition amount for its transition year in respect of that insurance business.

Subsection 20.4(2) of the Act operates in conjunction with new subsection 12.5(3) of the Act. In general terms, if an insurer has deducted an amount under subsection 20.4(2), subsection 12.5(3) requires a corresponding inclusion – recognized over a 5-year period beginning with its transition year – in computing the insurer’s income from that business.

For further details, readers may refer to the commentary on section 12.5.

New subsection 20.4(2) applies to taxation years that begin on or after October 1, 2006.

Transition year income inclusion reversal

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20.4(3)

New subsection 20.4(3) of the Act requires that an insurer deduct an amount in computing its income in respect of an insurance business if the insurer has included an amount under subsection 12.5(2) of the Act in computing its income for its transition year from that business. The amount to be deducted by the insurer, for each of its particular taxation years that ends after the start of the transition year, in computing the insurer’s income from that insurance business, is the amount determined by the formula

A x B/1825

where

A is the amount included under subsection 12.5(2) in computing the insurer’s income for its transition year from that insurance business, and

B is the number of days in the particular taxation year that are before the day that is 1825 days after the first day of the transition year.

For further details, readers may refer to the commentary to subsection 12.5(2) and the definitions "reserve transition amount" and "transition year" in subsection 12.5(1) of the Act.

New subsection 20.4(3) applies to taxation years that begin on or after October 1, 2006.

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20.4(4)

New subsection 20.4(4) of the Act is one of a series of special rules, contained in subsections 12.5(4) to (9) and 20.4(4) of the Act, that provide for the appropriate treatment of an insurer’s reserve transition amounts in circumstances in which the insurer or its business, as the case may be, has been transferred, reorganized or ended.

New subsection 20.4(4) of the Act applies if at a particular time an insurer ceases to carry on all or substantially all of an insurance business (the "discontinued business"), and none of the special continuity rules contained in subsections 12.5(4) to (6) apply to that cessation. In these circumstances, subsection 20.4(4) requires that the insurer deduct — in computing its income from the discontinued business for its taxation year that includes the time that is immediately before the particular time — the amount determined by the formula A – B set out in that subsection.

Element A of the formula is the amount included under subsection 12.5(2) of the Act in computing the insurer’s income from the discontinued business for its transition year.

Element B of the formula is the total of all amounts each of which is an amount deducted under subsection 20.4(3) of the Act in computing the insurer’s income from the discontinued business for a taxation year that began before the particular time.

In general terms, the positive amount, if any, resulting from the formula represents an acceleration of the recognition of any outstanding amounts that the insurer would otherwise have been required — had the business not ceased — to deduct by operation of subsection 20.4(3) in computing its income in respect of the discontinued business.

See also the commentary on subsections 12.5(8) and (9) of the Act.

New subsection 20.4(4) applies to taxation years that begin on or after October 1, 2006.

Clause 5

Capital Gains

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39

Section 39 of the Act sets out the meaning of capital gain, capital loss and business investment loss and provides a number of special rules relating to capital gains including the provisions which guarantee capital gains treatment to certain taxpayers in respect of the disposition of Canadian securities.

Meaning of capital gain and capital loss

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39(1)(a)(ii.2)

Paragraph 39(1)(a) of the Act describes a taxpayer's capital gain for a taxation year from the disposition of property. Under this paragraph, gains from dispositions of specified properties are to be excluded in determining a capital gain from the disposition of the property.

Subparagraph 39(1)(a)(ii.2) provides an exclusion for specified debt obligations if subsection 142.4(4) or (5) of the Act applies to the disposition, and for mark-to-market properties if subsection 142.5(1) of the Act applies to the disposition. (The expressions "specified debt obligation" and "mark-to-market property" are defined in subsection 142.2(1) of the Act.) These exclusions are required in case the gain that is determined under subdivision c of the Act exceeds the profit or gain determined for the purpose of the new rules for financial institutions.

Subparagraph 39(1)(a)(ii.2) is amended to clarify that it applies to a property if the disposition (described in the opening words of paragraph 39(1)(a)) is a disposition to which subsection 142.4(4) or (5) or 142.5(1) applies.

This amendment applies to taxation years that begin on or after October 1, 2006.

Clause 6

Calculation of Gain or Loss

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40

Section 40 of the Act provides rules for determining a taxpayer’s gain or loss from the disposition of a property.

Section 40 is amended by adding new subsections (10) and (11), consequential on the introduction of new subsections 111(12) and (13) of the Act. New subsections 111(12) and (13) extend the general treatment of accrued capital gains and losses on an acquisition of control of a corporation to also apply to a corporation’s accrued capital gains and capital losses resulting from foreign currency fluctuations on debt liabilities denominated in a foreign currency.

For more information regarding the definition "foreign currency debt", readers may please refer to the notes to subsection 111(8) of the Act, below.

Application

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40(10)

New subsection 40(10) of the Act provides the conditions for new subsection (11) to apply. Specifically, subsection (10) provides that subsection (11) applies in computing at any particular time a corporation’s gain or loss (in these notes and in subsections 40(10) and (11) referred to as the "new gain" or "new loss") from a fluctuation in the value of the currency of a foreign currency debt of the corporation (other than, for greater certainty, a gain or a capital loss that arises because of the application of new subsection 111(12) of the Act), if the corporation has previously realized a capital loss or gain in respect of the foreign currency debt because of subsection 111(12). The portion of the foreign currency debt that gives rise to the new gain or new loss is referred to in subsections 40(10) and 40 (11) as the "relevant part".

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40(11)

New subsection 40(11) of the Act provides a mechanism for the computation of the gain or loss on a foreign currency debt that takes into account the impact of gains and losses already recognized in respect of a foreign currency debt because of new subsection 111(12) of the Act. This is necessary because, unlike gains and losses in respect of property, gains and losses from a fluctuation in the value of the currency of a foreign currency debt of the corporation are not referable to a cost base that may be adjusted to account for previously recognized gains and losses.

The formula in new subsection 40(11) provides that the new gain is the positive amount, or the new loss is the negative amount, equal to:

A + B – C

A is, in effect, the new gain or new loss as it would be calculated if new subsection 111(12) had never applied in relation to the foreign currency debt.

B is the portion of a capital loss previously realized by the corporation, in respect of the foreign currency debt and because of subsection 111(12), that is reasonably attributable to the relevant part of the foreign currency debt.

C is the portion of a gain previously realized by the corporation at any time before the particular time, in respect of the foreign currency debt and because of subsection 111(12), that is reasonably attributable to the relevant part of the foreign currency debt.

 Example[1] T1: Canco borrows F$1 million. The exchange rate at T1 is F$1 = C$1.20. T2: Canco undergoes an acquisition of control. The exchange rate at T2 is F$1 = C$1.15. Applying new subsection 111(12), Canco realizes a capital gain, due to the fluctuation of the value of the foreign currency relative to the Canadian dollar, of$50,000 in respect of that debt. T3: Canco repays F$400,000 to its creditor. The exchange rate at T3 is F$1 = C$1. The new gain or loss at T3 is determined by the formula: A + B – C A is$80,000 (the amount of the new gain that would have been realized on the repayment of the F$400,000 if subsection 111(12) did not apply) B is nil (there is no previous capital loss in this case) C is$20,000 (the amount of the gain already recognized in respect of the F$400,000 at T2) Therefore the new gain or loss under subsection 40(11) is:$80,000 + 0 – $20,000 =$60,000 The result is a positive number, resulting in a gain of $60,000.  Example 2 Same facts as situation 1, except that at T3, the exchange rate is F$1 = C$1.25. The new gain or loss at T3 is: A +B – C A is –$20,000 (the amount of the new loss in respect of the F$400,000 repayment, calculated without reference to subsection 111(12), multiplied by (–1)). B is nil C is$20,000 (the amount of the gain already recognized in respect of the F$400,000 at T2) Therefore the new gain or loss under subsection 40(11) is: –$20,000 + 0 – $20,000 = –$40,000 Canco will recognize a $40,000 loss on the repayment. This larger loss reflects Canco’s previously recognition of a gain in relation to the foreign currency debt. New subsections 40(10) and (11) apply after 2005. Clause 7 Deemed settlement on SIFT winding-up ITA 80.01(5.1) New subsection 80.01(5.1) of the Act is one of a series of amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. Among these amendments are the new definitions "SIFT trust wind-up event" and "SIFT wind-up entity" in subsection 248(1) of the Act. New subsection 80.01(5.1) of the Act applies where a debt owed by one trust ("the subsidiary trust") to its beneficiary – another trust that is a SIFT wind-up entity – is settled as a consequence of a distribution that is a SIFT trust wind-up event. If the settlement is without payment, or for a payment that is less than the principal amount of the debt, then the rules in paragraphs 80.01(5.1)(a) to (c) apply in respect of the settlement. Under paragraphs 80.01(5.1)(a) and (b), if the settlement payment is less than the adjusted cost base ("ACB") to the SIFT wind-up entity of the settled debt and the SIFT wind-up entity so elects, the amount paid in satisfaction of the principal amount of the debt obligation is deemed to be the amount of that ACB plus any amounts added in computing the SIFT wind-up entity’s income in respect of the portion of the indebtedness representing unpaid interest, to the extent that the SIFT wind-up entity has not deducted any amounts as bad debts in respect of that unpaid interest. Paragraph 80.01(5.1)(c) provides a timing rule that applies for purposes of the debt forgiveness rules in section 80 of the Act. Under that paragraph, the settlement is treated for those purposes as having occurred immediately before the time that is immediately before the time of the distribution. This rule ensures that there is an appropriate reduction under section 80 in the cost amount of distributed property. This subsection applies after Announcement Date. Clause 8 Rollover ITA 85.1 Section 85.1 of the Act permits a tax deferred rollover for shareholders who exchange shares of a taxable Canadian corporation for shares of a Canadian purchaser corporation in the course of an arm’s length sale of the acquired corporation’s shares. SIFT unit for share exchange ITA 85.1(7) and (8) New subsection 85.1(7) of the Act is one of a series of amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. Among these amendments are the new definitions "SIFT trust wind-up event", "SIFT wind-up entity" and "SIFT wind-up entity equity" in subsection 248(1) of the Act. Subsection 85.1(7) sets out the conditions that must be met in order for the rules in subsection 85.1(8) of the Act to apply to a taxpayer’s disposition of a unit in a SIFT wind-up entity to a corporation in exchange for a share of the corporation. Subsection 85.1(7) requires that • the corporation be a taxable Canadian corporation and that the disposition occur during a specified 60-day period ("the exchange period) at the end of which the corporation owns 100% of the equity in the SIFT wind-up entity then outstanding. For this purpose, "SIFT wind-up entity equity" generally means, in respect of a SIFT wind-up entity, a capital interest in a trust or a membership interest as a limited partner in a partnership. For more detail, readers may refer to the commentary on that definition. • the taxpayer dispose of all of its equity in the SIFT wind-up entity during the exchange period and receive, as consideration, nothing other than shares ("exchange shares") of the corporation having a fair market value equal to the equity; and • all of the exchange shares issued to holders of equity in the SIFT wind-up entity be of a single class. New subsection 85.1(8) of the Act provides a number of the tax consequences to the taxpayer from a disposition described in subsection 85.1(7). Specifically, • subsections 85(1) and (2) do not apply in respect of the disposition; • the taxpayer is provided with a tax-deferred exchange of the particular unit for the exchange share; and • if the particular unit was taxable Canadian property of the taxpayer, the exchange share is deemed to be taxable Canadian property of the taxpayer. New subsection 85.1(8) also deems the cost to the corporation of the particular unit to be the lesser of its fair market value and the amount determined by element B of the formula in paragraph 85.1(8)((e). That element B, described in greater detail below, is generally the portion of the SIFT wind-up entity's trust’s outstanding capital that is attributable to the particular unit. Finally, subsection 85.1(8) provides for a deduction, after the particular disposition, from the paid-up capital in respect of each class of shares of the capital stock of the corporation. This deduction is determined by the formula (A-B) x C/A. The elements of that formula are as follows: • A is the increase in the paid-up capital in respect of each class of the capital stock of the corporation (determined before applying the formula in paragraph 85.1(8)(e)) resulting from the particular disposition. • B is generally the portion of the outstanding capital of the SIFT wind-up entity's that is attributable to the particular unit. More specifically, if the SIFT wind-up entity is a trust, B will be the difference between the consideration received by the trust on the issuance of the particular unit and any amounts that have ever become payable (other than as income or capital gains) in respect of the particular unit to a holder of the particular unit. Where the SIFT wind-up entity is a partnership, B will be the difference between • the total of amounts that have been added in computing the adjusted cost base (ACB) to any taxpayer of the particular unit on or before the particular disposition because of subparagraphs 53(1)(e)(iv) or (x) of the Act or that would have been so added under subparagraph 53(1)(e)(i) if that subparagraph had been applied as though subsection 96(1) of the Act were read, and • the total of amounts that have been deducted in computing the ACB to any taxpayer of the particular unit on or before the particular disposition because of subparagraphs 53(2)(c)(iv) or (v) of the Act or that would have been so deducted under subparagraph 53(2)(c)(i) if that subparagraph had been applied as though subsection 96(1) of the Act were read in specified manner.[2] If the conditions of subsection 85.1(7) are met in respect of a disposition, subsection 85.1(8) will apply to the disposition provided that the disposition occurs on or after Announcement Date and before 2013. In addition, if a disposition occurs after December 19, 2007 and before Announcement Date and the corporation validly elects (either alone, or if the taxpayer has filed an election under subsection 85(1) or (2) of the Act in respect of the disposition, together with the taxpayer), then subsections 85.1(8) will apply in respect of that disposition (provided that the conditions in subsection 85.1(7) are met). Clause 9 Amalgamation ITA 87 Section 87 of the Act provides rules that apply where there has been an amalgamation of two or more taxable Canadian corporations to form a new corporation. The new corporation is generally treated as a continuation of its predecessor for the purposes of the Act. Financial institution rules ITA 87(2)(g.2) Paragraph 87(2)(g.2) of the Act provides that, for the purposes of a number of the rules for financial institutions in sections 142.4 to 142.6 of the Act, the new corporation formed on an amalgamation is deemed to be the same corporation as, and a continuation of, each predecessor corporation. Paragraph 87(2)(g.2) is amended to include a reference to new subsection 142.51(11) of the Act. This change is proposed as a result of the introduction of new section 142.51 of the Act. For further detail, readers may refer to the commentary to new section 142.51. This amendment applies to taxation years that begin on or after October 1, 2006. Amalgamations involving a SIFT wind-up corporation ITA 87(2)(s.1) New paragraph 87(2)(s.1) of the Act provides that, on an amalgamation (within the meaning of subsection 87(1) of the Act), of a SIFT wind-up corporation and one or more other corporations, the corporation formed on the amalgamation is deemed to be a SIFT wind-up corporation. Because of paragraph 88(1)(e.2) of the Act, if a SIFT wind-up corporation is the subject of a winding-up into its parent in circumstances to which subsection 88(1) of the Act applies, the parent will also be deemed to be a SIFT wind-up corporation. This amendment applies after December 19, 2007. Amalgamation of insurers ITA 87(2.2) Subsection 87(2.2) of the Act deals with the amalgamation of two or more corporations one or more of which is an insurer. Where this occurs, the resulting corporation is treated as a continuation of each of the predecessor insurance corporations for the purposes of section 138 and certain other provisions of the Act relating to insurers that are listed in subsection 87(2.2). This subsection is amended to add references to new subsections 12.5(8) and 20.4(4) of the Act. This change is proposed as a result of the introduction of new sections 12.5 and 20.4. For further details, readers may refer to the commentary to new sections 12.5 and 20.4. This amendment applies to taxation years that begin on or after October 1, 2006. Clause 10 Wind-up ITA 88 Section 88 of the Act deals with the tax consequences arising from the winding-up of a corporation. Winding-up ITA 88(1)(g) Subsection 88(1) of the Act deals with the winding-up of a corporation that is a subsidiary into its parent. Subparagraph 88(1)(g)(i) treats the parent corporation as a continuation of a subsidiary that is an insurance corporation for the purposes of certain provisions relating to insurers listed in subparagraph 88(1)(g)(i). This subparagraph is amended to add references to proposed new subsections 12.5(8) and 20.4(4) of the Act. This change is proposed as a result of the introduction of new sections 12.5 and 20.4. For further details, readers may refer to the commentary to new sections 12.5 and 20.4. This amendment applies to taxation years that begin on or after October 1, 2006. Clause 11 New section 88.1 of the Act is one of a series of amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. Section 88.1 provides for the tax consequences on a trust’s distribution that is a SIFT trust wind-up event (as defined in subsection 248(1)). The section allows certain trusts (i.e., a SIFT wind-up entity and its wholly-owned subsidiary trusts) to access the wind-up rules in subsections 88 (1) to (1.7) (and section 87 as it applies for those purposes) in respect of such a distribution. SIFT trust wind-up event ITA 88.1(1) and (2) New subsection 88.1(1) of the Act sets out the conditions that must be met in order for the rules in subsection 88.1(2) of the Act to apply to a trust’s distribution of property to a taxpayer. Subsection 88.1(1) requires that the distribution be a "SIFT trust wind-up event", as defined in subsection 248(1) of the Act. The trust must be a "SIFT wind-up entity" that has only a taxable Canadian corporation as its beneficiary, or a trust the only beneficiary of which is such a SIFT wind-up entity. As well, the distribution must take place within 60 days of a first distribution of the property that is a SIFT trust wind-up event. Finally, paragraph 88.1(1)(d) provides an ordering rule with respect to the interaction of subsection 88.1(2) and subsection 107(3.1) of the Act. Where the property distributed is shares of a taxable Canadian corporation, that paragraph provides that subsection 88.1(2) will apply only if: • the trust did not acquire the shares on a distribution to which subsection 107(3.1) applies, and • the trust elects that section 88.1 apply to the distribution. New subsection 88.1(2) allows many of the rules in section 88 to apply to a trust’s distribution, subject to certain modifications. The modifications treat the trust as a taxable Canadian corporation that is not a private corporation, the distribution by the trust as the winding up of the corporation, and the taxpayer’s interest as a beneficiary of the trust as shares of the corporation. Since a trust does not have paid-up capital, what is in effect a synthetic paid-up capital is created for these purposes. This will be the excess, if any, of amounts received in exchange for the issuance of an interest as beneficiary over the total of all distributions other than amounts payable out of the trust’s income or capital gains. Clause 12 Dividends, etc. ITA 89 Section 89 of the Act defines certain terms that apply to corporations and their shareholders and includes provisions related to those definitions. Definition "general rate income pool" ITA 89(1) The "general rate income pool" (GRIP), the definition of which is one of those included in subsection 89(1) of the Act , is relevant for determining the extent to which a Canadian-controlled private corporation (CCPC) or a deposit insurance corporation (DIC) can pay eligible dividends in any given taxation year. Generally, a corporation’s GRIP is calculated based on the corporation’s taxable income subject to tax at the general corporate tax rate. The formula contained in this definition contains a factor of 0.68, which is intended to approximate the after-tax earnings of the corporation, assuming a notional combined federal-provincial general corporate rate of 32%. The definition is amended to adjust the GRIP factor to reflect the continuing reduction of the general corporate tax rate. Specifically, the decimal fraction .68 is replaced by a new variable, described in the revised formula as D. The value of D is as follows: (a) for the 2009 taxation year, 0.68, (b) for the 2010 taxation year, 0.69, (c) for the 2011 taxation year, 0.70, and (d) for taxation years after 2011, 0.72. Due to this change, the other variables contained in the GRIP formula have been renumbered accordingly. In addition, existing variable B is rewritten as a formula. This improves clarity without effecting any substantive change. The amendments to the definition "general rate income pool" in subsection 89(1) apply on Royal Assent. ITA 89(1) "paid-up capital" The definition "paid-up capital" is contained in subsection 89(1) of the Act. Paragraph (b) of the definition defines "paid-up capital" in respect of a class of shares of the capital stock of a corporation. Subparagraph (b)(iii) of the definition provides that, after March 31, 1977, paid-up capital is to be calculated without reference to any provisions of the Act other than those listed in the subparagraph. The definition "paid-up capital" is amended in conjunction with a series of other amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. The amendment adds references to new subsection 85.1(8) of the Act. This amendment applies after December 19, 2007. Clause 13 Foreign affiliates ITA 95 Section 95 of the Act defines a number of terms and provides rules relating to the taxation of resident shareholders of foreign affiliates. Definitions ITA 95(1) Subsection 95(1) of the Act defines a number of terms, for the purposes of sections 90 to 93 and 95 of the Act, that are used in connection with the rules dealing with the taxation of resident shareholders of foreign affiliates. "antecedent corporation", "calculating currency", "designated acquired corporation" and "specified person or partnership" The definitions "antecedent corporation", "calculating currency", "designated acquired corporation" and "specified person or partnership" are added to subsection 95(1). For detail about those new definitions, readers may refer to the commentary for new paragraphs 95(2)(f) to (f.15). Application – Foreign affiliates ITA 95(2) Subsection 95(2) of the Act provides rules for determining the income of a foreign affiliate resident in Canada from a particular source. ITA 95(2)(f) to (f.15) Current paragraph 95(2)(f) of the Act sets out rules for computing a taxable capital gain and an allowable capital loss of a foreign affiliate of a taxpayer resident in Canada from a disposition of property. The rules in paragraph 95(2)(f) address the computation of a gain or loss from a disposition of property whether the disposition is made by the foreign affiliate itself or by a partnership of which the foreign affiliate is a member. Those rules, which consist of a "main rule", a "reading rule", "currency rules" and a "carve-out rule", are relevant for the purposes of computing the foreign affiliate’s tax surpluses and deficits in respect of the taxpayer and computing the foreign affiliate’s foreign accrual property income (FAPI) or loss (FAPL) in respect of the taxpayer. • The main rule provides that the taxable capital gain or allowable capital loss of a foreign affiliate of a taxpayer from a disposition of property is to be computed in respect of the taxpayer in accordance with Part I of the Act as though the foreign affiliate were resident in Canada. • The reading rule provides that, in reading Part I of the Act to make that computation, Part I is to be read without reference to section 26 of the Income Tax Application Rules. • The currency rules provide that the computation of such a gain or loss is to be in the currency determined by subparagraph 95(2)(f)(i) or (ii), as the case may be. As part of the currency rules, subparagraph 95(2)(f)(ii) includes a rule with respect to the reading of subsection 39(2) of the Act. • The carve-out rule provides that, in computing any such gain or loss from the disposition of property that was owned by the foreign affiliate at the last time that the foreign affiliate became a foreign affiliate of the taxpayer resident in Canada, there is not to be included such portion of the gain or loss, as the case may be, as can reasonably be considered to have accrued during the carve-out period, i.e., the period that the foreign affiliate was not a foreign affiliate of the taxpayer resident in Canada or of a person specified in any of current subparagraphs 95(2)(f)(iv) to (vii). The main rule, reading rule, currency rules and carve-out rule in current paragraph 95(2)(f) are replaced by the main, reading, currency and carve-out rules in new paragraphs 95(2)(f) to (f.15). Furthermore, the reference to the taxpayer and the other persons specified in current subparagraphs 95(2)(f)(iii) to (vii) is replaced by a reference to the persons specified in the new definition "specified person or partnership", in respect of the taxpayer, in subsection 95(1). This definition does not include "designated acquired corporations" as newly defined in subsection 95(1) but is expanded by the deeming rules in new subsection 95(2.6). ITA 95(2)(f) New paragraph 95(2)(f) sets out the new version of the "main rule". It provides that, except as otherwise provided in subdivision i of Division B of Part I of the Act and except to the extent that the context otherwise requires, a foreign affiliate of a taxpayer is deemed to be at all times resident in Canada for the purposes of determining, in respect of the taxpayer for a taxation year of the foreign affiliate, certain amounts, i.e., each amount that is the foreign affiliate’s • capital gain, capital loss, taxable capital gain or allowable capital loss from a disposition of a property, or • income or loss from a property, from a business other than an active business or from a non-qualifying business. New paragraph 95(2)(f) deals with the computation of a broader range of amounts than under the main rule in current paragraph 95(2)(f), which dealt only with the computation of the foreign affiliate’s taxable capital gain or allowable capital loss from a disposition of property. Note that the mention of capital gain and capital loss in new paragraph 95(2)(f) is intended as a clarifying change to the law to deal with dispositions by partnerships. ITA 95(2)(f.1) New paragraph 95(2)(f.1) sets out the new version of the "carve-out rule". It provides that, in computing an amount described in new paragraph 95(2)(f), in respect of a property or a business, there is not to be included any portion of that amount that can reasonably be considered to have accrued while no person or partnership that held the property, or carried on the business, was a "specified person or partnership" in respect of the taxpayer. The new definition "specified person or partnership" in subsection 95(1) is relevant for new paragraph 95(2)(f.1). The new definition "designated acquired corporation" in subsection 95(1) is relevant for the definition "specified person or partnership". The new definition "antecedent corporation" in subsection 95(1) is relevant for the definitions "designated acquired corporation" and "specified person or partnership" and new subsection 95(2.6) of the Act. "Specified person or partnership", in respect of a taxpayer, at any time, is defined in subsection 95(1) to mean a person (other than a "designated acquired corporation"), or a partnership, that is (a) the taxpayer, (b) a person (other than a partnership) that, at that time, is resident in Canada and does not deal at arm’s length with the taxpayer, (c) a corporation that would, at that time, be an antecedent corporation of the taxpayer or of a person described in (b) if the reference to "subsection 87(11)" in the definition "antecedent corporation" were read as a reference to "section 87", (d) a foreign affiliate of a person described in any of (a) to (c) or of a partnership described in (e), or (e) a partnership a member of which is described in any of (a) to (d). "Designated acquired corporation" of a taxpayer is defined in subsection 95(1) to mean an antecedent corporation of the taxpayer if control of the antecedent corporation was acquired by the taxpayer or another antecedent corporation and the acquiring person dealt at arm’s length with the antecedent corporation immediately before the acquisition of control. "Antecedent corporation" of a particular corporation at any time is defined in subsection 95(1) to mean a corporation that • was a predecessor corporation (within the meaning assigned by subsection 87(1) of the Act) in respect of an amalgamation that occurred after that time, if subsection 87(11) applied to the amalgamation and the particular corporation was formed by the amalgamation, or • was wound-up into the particular corporation in a winding-up that began after that time, if subsection 88(1) applied to the winding-up.  Example 1 The following example illustrates the operation of the definition "designated acquired corporation" in conjunction with new paragraphs 95(2)(f) and (f.1). Facts: 1. Parent and Target are corporations resident in Canada that deal with each other at arm’s length. 2. FA1 and FA2 are foreign affiliates of Target. Target owns all of the shares of FA1, a non-resident corporation. FA1 owns all of the shares of FA2, also a non-resident corporation. 3. Parent forms Acquireco, a corporation resident in Canada. Parent owns all of the shares of Acquireco. 4. Acquireco purchases all of the shares of Target on May 1, 2008. 5. Target and Acquireco amalgamate on June 1, 2008 (under an amalgamation to which subsection 87(11) applies) to form Amalco. 6. At the time of the acquisition of control of Target, FA1 has an accrued capital gain of$1 million on its shares of FA2 which are not excluded property of FA1. 7. On June 1, 2010, FA1 disposes of the shares of FA2 and has a capital gain of $2.5 million from that disposition.Results: A. Target is an antecedent corporation of Amalco (the taxpayer). As such, absent the "designated acquired corporation" rule, Target would be a "specified person or partnership" in respect of Amalco. In computing FA1’s capital gain in respect of Amalco in FA1’s taxation year that includes June 1, 2010, FA1 would thus, in accordance with current paragraph 95(2)(f) or new paragraphs 95(2)(f) to (f.15), be required to recognize the full gain of$2.5 million from the disposition of the FA2 shares, even though $1 million of the$2.5 million gain accrued while Parent and Target were dealing with each other at arm’s length and that same gain was recognized at the time of acquisition of control by the shareholders of Target on their disposition of shares of Target. B. The "designated acquired corporation" definition ensures that the $1 million portion of the gain accrued in Target before the takeover is excluded in computing FA1’s capital gain from the disposition of the FA2 shares determined in respect of Amalco. However, that portion of the gain that accrued while FA1 was a foreign affiliate of Acquireco (i.e., from May 1, 2008 to June 1, 2008) or Amalco (i.e., after June 1, 2008) will be included in computing FA1’s capital gain from the disposition of the FA2 shares determined in respect of Amalco as Acquireco and Amalco would each be a specified person or partnership in respect of Amalco and would not be a designated acquired corporation. C. Similarly, if instead of a gain FA1 had a loss from the disposition of the FA2 shares, any portion of that loss that accrued before the acquisition of control of Target would be excluded in computing FA1’s capital loss from the disposition of the FA2 shares determined in respect of Amalco. Note that it is expected that the Income Tax Regulations will be amended to provide that FA1’s surplus balances vis-à-vis Amalco would, in these circumstances, be reset to zero. New subsection 95(2.6) contains deeming rules for the purpose of the definition "specified person or partnership". It provides that, for the purpose of that definition, if a person or partnership (the "taxpayer") is not dealing at arm’s length with another person or partnership (the "particular person") at a particular time, two special rules apply: • The taxpayer is treated as having existed and as not having dealt at arm’s length with the particular person, nor with each antecedent corporation of the particular person, throughout the period that began when the particular person or the antecedent corporation, as the case may be, came into existence and that ends at the particular time, and • The taxpayer is treated as not having dealt at arm’s length with any person or partnership with which the particular person or an antecedent corporation, as the case may be, did not deal at arm’s length during the period specified above.  Example 2 The following example illustrates the operation of new subsection 95(2.6) in conjunction with new paragraphs 95(2)(f) and (f.1). Facts: 1. From 2000 to 2007, Canco 1 (a corporation resident in Canada) owns all of the shares of Canco 2 (a corporation resident in Canada), which in turn owns all of the shares of FA (a non-resident corporation). During that time, property of FA that is not excluded property (within the meaning of subsection 95(1)) accrues a gain of$1,000,000. 2. In January 2008, Canco 2 is liquidated into Canco 1, thereby resulting in the shares of FA that are held by Canco 2 being transferred to Canco 1. 3. On June 1, 2008, Canco 1 forms Canco 3 (a corporation resident in Canada) and transfers the shares of FA to Canco 3. 4. Immediately after the transfer of FA shares to Canco 3, FA disposes of the non-excluded property and realizes a gain of $1,000,000. Results: Because Canco 3 did not exist while the gain on the non-excluded property accrued in FA, the result (in the absence of subsection 95(2.6)) would be that the gain accrued in FA while the non-excluded property was held by a holder (Canco 2) that was not a specified person or partnership in respect of Canco 3. This would cause those gains to be excluded in computing the gains realized by FA determined in respect of Canco 3. Subsection 95(2.6) ensures, by virtue of paragraph 95(2.6)(a), that because Canco 3 (the taxpayer) was not dealing at arm’s length with Canco 1 (the particular person) on June 1, 2008 (the particular time), Canco 3 is deemed to exist, and not to be dealing at arm’s length with Canco 1, in the years 2000 to 2007. As well, by virtue of paragraph 95(2.6)(b), because Canco 1 (the particular person) was not dealing at arm’s length with Canco 2 (third person) in the years 2000 to 2007, Canco 3 (the taxpayer) is deemed not to be dealing at arm’s length with Canco 2 (third person) in those years. As a result, those accrued gains on the non-excluded property of FA are considered to have accrued while FA was a foreign affiliate of a holder (Canco 2) that was a specified person or partnership in respect of Canco 3, and those accrued gains on the excluded property of FA would be recognized in computing the gains realized by FA determined in respect of Canco 3. Alternatively, if subsection 88(1) of the Act applies on the liquidation of Canco 2, paragraph 95(2.6)(a) alone would cause Canco 2 to be a specified person or partnership in respect of Canco 3, by reason of Canco 2 being an antecedent corporation of Canco 1. ITA 95(2)(f.11) New paragraph 95(2)(f.11) incorporates the "reading rule" from current paragraph 95(2)(f) and provides reading rules and a deeming rule that are required by the expansion of the general rule in new paragraph 95(2)(f) to income or loss from property, from a business other than an active business, and from a non-qualifying business. The new paragraph provides that, in determining an amount described in new paragraph 95(2)(f) for a taxation year of a foreign affiliate of a taxpayer, if the amount is described in subparagraph 95(2)(f)(i), the Act is to be read without reference to section 26 of the Income Tax Application Rules. If the amount is described in subparagraph 95(2)(f)(ii), two consequences follow. First, the Act is to be read without reference to subsections 14(1.01) to (1.03), 17(1) and 18(4) and section 91, except that, where the foreign affiliate is a member of a partnership, section 91 is to be applied to determine the income or loss of the partnership and for that purpose subsection 96(1) is to be applied to determine the foreign affiliate’s share of that income or loss of the partnership. Second, if the foreign affiliate has, in the taxation year, disposed of a foreign resource property in respect of a country, it is treated as having designated, in accordance with subparagraph 59(1)(b)(ii) of the Act, the amount, if any, by which the amount determined under paragraph 59(1)(a) in respect of the disposition exceeds the amount determined under subparagraph 59(1)(b)(i) in respect of the disposition. ITA 95(2)(f.12) to (f.15) New paragraphs 95(2)(f.12) to (f.15) set out the new version of the currency rules. The new definition "calculating currency" in subsection 95(1) is relevant for those paragraphs. "Calculating currency", for a taxation year of a foreign affiliate of a taxpayer resident in Canada, is defined to mean either the currency of the country in which the foreign affiliate is resident at the end of the taxation year, or any currency that the taxpayer establishes to be reasonable in the circumstances. ITA 95(2)(f.12) New paragraph 95(2)(f.12) provides that a foreign affiliate of a taxpayer shall determine each of the following amounts in its calculating currency for a taxation year: • Subject to paragraph 95(2)(f.13), each capital gain, capital loss, taxable capital gain and allowable capital loss from the disposition of a capital property that was an excluded property; • Its income or loss from each active business carried on by it in a country; and • Its income or loss that is included in computing its income or loss from an active business for the taxation year because of paragraph 95(2)(a). ITA 95(2)(f.13) New paragraph 95(2)(f.13) provides that a foreign affiliate of a taxpayer shall determine the amount included in computing its foreign accrual property income that is attributable to its capital gain or taxable capital gain, from the disposition of an excluded property, in Canadian currency by converting the amount of the capital gain, or taxable capital gain, otherwise determined under subparagraph 95(2)(f.12)(i) in its calculating currency for the taxation year into Canadian currency using the rate of exchange quoted by the Bank of Canada at noon on the day on which the disposition was made. ITA 95(2)(f.14) New paragraph 95(2)(f.14) provides that a foreign affiliate of a taxpayer shall determine in Canadian currency each amount of its income, loss, capital gain, capital loss, taxable capital gain or allowable capital loss for a taxation year, other than an amount to which paragraph 95(2)(f.12) or (f.13) applies. ITA 95(2)(f.15) New paragraph 95(2)(f.15) is a reading rule for subsection 39(2) of the Act that replaces the reading rule contained in current subparagraph 95(2)(f)(ii). Subsection 39(2) sets out rules that apply when a taxpayer realizes a gain or loss because of a fluctuation in currency exchange rates. New paragraph 95(2)(f.15) ensures that for the purpose of applying new subparagraph 95(2)(f)(i), subsection 39(2) reflects the concept of a "calculating currency". Coming-into-force 95(2)(f) to (f.15) and related provisions New paragraphs 95(2)(f) to (f.15) and subsection 95(2.6) of the Act and the definitions "antecedent corporation", "calculating currency", "designated acquired corporation" and "specified person or partnership" in subsection 95(1) of the Act apply to taxation years of a foreign affiliate of a taxpayer that begin after October 2, 2007. However, there are three transitional rules. First, if the taxpayer elects in writing in respect of all of its foreign affiliates and files the election with the Minister of National Revenue on or before the taxpayer’s "election day", those provisions also apply to taxation years, of the foreign affiliates, that begin before October 2, 2007 and after one of the three following dates, as chosen by the taxpayer in its election: 1. December 31, 1994, 2. December 20, 2002, or 3. February 27, 2004. Second, for foreign affiliate taxation years that begin before 2009, new subparagraph 95(2)(f)(ii) of the Act is to be read without reference to the expression "income from a non-qualifying business". This is because the definition "income from a non-qualifying business" in subsection 95(1) applies only to foreign affiliate taxation years that begin after 2008. Third, a taxpayer may – by making a valid election – opt to have a transitional version of new subsection 95(2.6) of the Act apply to taxation years of foreign affiliates of the taxpayer that began before Announcement Date and after October 2, 2007. That transitional version is a modified version of the rule announced on October 2, 2007. It provides that, for the purpose of the definition "specified person or partnership" in subsection 95(1), in determining whether, at a particular time, a person was not, at a time (the "prior time") that is before the particular time and at which that person did not exist, dealing at arm’s length with another person, where the person exists at the particular time but did not exist at the prior time, • the person is deemed to exist at the prior time, and • if the person is related to another person at the particular time, the person is deemed to have been related to that other person at the prior time. In this connection, the taxpayer’s "election day" means the later of (i) the taxpayer’s filing-due date for the taxpayer’s taxation year that includes the day on which the legislation enacting these amendments receives Royal Assent and (ii) the day that is one year after Royal Assent. Qualifying interest throughout the year ITA 95(2.2) Current subsection 95(2.2) of the Act provides rules for the purposes of subsection 95(2) of the Act (except paragraph 95(2)(f)). Those rules are essentially aimed at cases where a taxpayer acquires or ceases to have a qualifying interest in, or becomes or ceases to be related to, a non-resident corporation. Specifically, in certain circumstances a non-resident corporation that is not a foreign affiliate of a taxpayer in respect of which the taxpayer has a qualifying interest throughout a particular taxation year but was such a foreign affiliate at the beginning or the end of the particular year is deemed to be a foreign affiliate of the taxpayer in respect of which the taxpayer has a qualifying interest throughout that particular taxation year. Similarly, for foreign affiliate taxation years that end before 2009, in certain circumstances a non-resident corporation that was not related to a taxpayer and a foreign affiliate of the taxpayer throughout a particular taxation year but was so related at the beginning or the end of the particular year is deemed to related to the taxpayer and the foreign affiliate of the taxpayer throughout that particular taxation year. These deeming rules are intended to apply only for the purposes of paragraphs 95(2)(a) and (g) of the Act. Subsection 95(2.2) is amended to confirm this intention. This amendment applies to taxation years of a foreign affiliate of a taxpayer that begin after 1994. Controlled foreign affiliate throughout the year ITA 95(2.201) Section 95 of the Act is amended by adding new subsection 95(2.201). The new subsection provides that, for the purposes of paragraphs 95(2)(a) and (g) of the Act, a non-resident corporation is deemed to be a controlled foreign affiliate of a taxpayer throughout a taxation year of the non-resident corporation if two conditions are met. First, a person or partnership must acquire or dispose of shares of a corporation and, because of the acquisition or disposition, become or cease to be a controlled foreign affiliate of the taxpayer. Second, at either or both of the beginning and end of the taxation year, the non-resident corporation must be a controlled foreign affiliate of the taxpayer. New subsection 95(2.201), in providing this result in connection with a controlled foreign affiliate of a taxpayer, is thus similar to current subsection 95(2.2), which provides an interpretive rule in connection with a foreign affiliate of a taxpayer in respect of which the taxpayer has a qualifying interest. New subsection 95(2.201) is applicable to taxation years of a foreign affiliate of a taxpayer that end after 1999. There are two transitional rules: 1. As the criterion that a non-resident corporation be a controlled foreign affiliate of a taxpayer was introduced into paragraph 95(2)(g) effective for taxation years of a foreign affiliate of a taxpayer that begin after December 20, 2002 (absent the Global Election mentioned below), the rules in subsection 95(2.201) apply only for the purposes of paragraph 95(2)(a) for foreign affiliate taxation years that begin before December 21, 2002. 2. However, if the taxpayer has made a valid election under subsection 26(46) of the Budget and Economic Statement Implementation Act, 2007, S.C. 2007, c. 35 (informally known as a Global Election), which invokes an earlier application of various amendments to the Act (including paragraphs 95(2)(a) and (g)), the amendment to subsection 95(2.201) will apply to taxation years of all foreign affiliates of the taxpayer that begin after 1994. Rules for the definition "specified person or partnership" ITA 95(2.6) Subsection 95(2.6) is added to section 95 of the Act. For detail about this new subsection, readers may refer to the commentary for new paragraphs 95(2)(f) to (f.15). Clause 14 Capital in a Trust Section 107 of the Act provides certain rules relating to the disposition of a capital interest in a trust. Distribution by personal trust ITA 107(2) Subsection 107(2) of the Act applies where a personal trust or a prescribed trust described in section 4800.1 of the Regulations distributes property to a beneficiary and there is a resulting disposition of part or all of the beneficiary's capital interest in the trust. Subsection 107(2) of the Act is amended in conjunction with a series of other amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. The subsection is amended so that it does not apply to a distribution that is a SIFT trust wind-up event. Other distributions ITA Where trust property is distributed by a trust to a beneficiary in satisfaction of the beneficiary's capital interest, the rules in subsection 107(2.1) apply if certain other sections do not apply. Subsection 107(2.1) is amended in conjunction with a series of other amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. The amendment ensures that subsection 107(2.1) does not apply to a distribution to which new subsections 107(3) and (3.1) apply. Distribution by SIFT wind-up entity ITA 107(3) and (3.1) New subsections 107(3) and (3.1) of the Act govern a distribution by a SIFT trust, subsequent to which the SIFT trust ceases to exist. These subsections are introduced as part of a series of amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. Subsection 107(3) sets out conditions that must be met for the rules in subsection 107(3.1) to apply. Generally, this subsection allows subsection (3.1) to apply to a "SIFT trust wind-up event" (newly defined in subsection 248(1) of the Act) provided section 88.1 does not apply, the property distributed is shares of a taxable Canadian corporation, and, if the trust is a "SIFT wind-up entity", all distributions that are SIFT trust wind-up events occur within a 60 day period. Subsection 107(3.1) allows for a tax-deferred distribution of a SIFT trust’s property. This is achieved by deeming the trust being wound up to dispose of the property for proceeds of disposition equal to the adjusted cost base of the property immediately before the disposition. The taxpayer holding the beneficial interest in the trust who receives the property is deemed to have disposed of its interest as a beneficiary of the trust for proceeds of disposition equal to the cost amount to the taxpayer of the interest immediately before the distribution. If the taxpayer is the only beneficiary of the trust, as would happen where the trust is wholly owned by another trust or corporation, and the taxpayer is a "SIFT wind-up entity" or a "SIFT wind-up corporation" (two new definitions in subsection 248(1)), the taxpayer is deemed to have acquired the trust property at a cost equal to its the adjusted cost base to the trust immediately before the disposition. In any other case, such as where the beneficial interests in the trust are held by the public, the property is deemed to be acquired at the cost amount to the taxpayer of the taxpayer’s interest as a beneficiary of the trust. If the taxpayer’s interest as a beneficiary under the trust was taxable Canadian property, the new property received is deemed to continue to be taxable Canadian property of the taxpayer. For more information, readers may refer to the notes under the definition "SIFT trust wind-up event" in subsection 248(1). This amendment applies after Announcement Date. Clause 15 Qualifying Dispositions ITA 107.4 Section 107.4 of the Act provides for the income tax consequences of a qualifying disposition (also defined in that section) of property to a trust. Tax consequences of qualifying dispositions ITA 107.4(3)(f) Subsection 107.4(3) of the Act applies where there has been a "qualifying disposition" of property to a trust within the meaning of subsection 107.4(1). Paragraph 107.4(3)(f) deems the transferred property to be taxable Canadian property ("TCP") of the trust if it was – by operation of any one of a number of specified provisions that deem property to be TCP – TCP of the transferor. Paragraph 107.4(3)(f) is amended to add to the list of specified deeming provisions references to new paragraphs 85.1(8)(c) and 107(3.1)(d) of the Act. Those new paragraphs apply to deem, in certain circumstances involving the conversion of a SIFT wind-up entity into a corporation, a share to be TCP of a taxpayer. This amendment, which applies after Announcement Date, is part of a series of amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. Clause 16 Definitions and Rules ITA 108 Section 108 of the Act sets out certain definitions and rules that apply for the purposes of subdivision k, which deals with the taxation of trusts and their beneficiaries. Definitions ITA 108(1) "cost amount" The definition "cost amount" in subsection 108(1) of the Act applies, for the purposes of sections 104 to 108 (except section 107.4 and notwithstanding the definition of that expression in subsection 248(1) of the Act)), in determining the cost amount to a taxpayer of the taxpayer’s capital interest in a trust. The definition is amended as part of a series of amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. This amendment ensures that the references in new paragraphs 107(3.1)(b) and (c) to the cost amount to a taxpayer of the taxpayer’s beneficial interest in a trust is determined without reference to the special definition "cost amount" in subsection 108(1). As a result, that cost amount is to be determined under the definition of that expression in subsection 248(1). This amendment applies after Announcement Date. Clause 17 ITA 111 Section 111 of the Act provides rules relating to the treatment of losses, and in particular establishes the extent to which a taxpayer is permitted to deduct, in computing taxable income for a taxation year, losses of other years. The new definitions "exchange rate" and "foreign currency debt" are added to subsection 111(8). As well, new subsections 111(12) and (13) are added to extend the general treatment of accrued capital gains and losses on an acquisition of control of a corporation, so that that treatment applies also to a corporation’s accrued capital gains and capital losses resulting from foreign currency fluctuations on debt liabilities denominated in a foreign currency. Definitions ITA 111(8) "exchange rate" The new definition "exchange rate" is relevant for the purposes of new subsections 40(10) and (11) of the Act and for new subsections 111(12) and (13), regarding capital gains and losses resulting from foreign currency fluctuations on debt liabilities denominated in a foreign currency. The "exchange rate" at any time in respect of a foreign currency is the rate of exchange between that currency and Canadian currency quoted by the Bank of Canada at noon (often referred to as the "Noon Rate") on the day that includes that time or, if that day is not a business day, on the day before; or a rate of exchange acceptable to the Minister. "foreign currency debt" The new definition "foreign currency debt" is relevant for the purposes of new subsections 40(10) and (11) of the Act and for new subsections 111(12) and (13), regarding capital gains and losses resulting from foreign currency fluctuations on debt liabilities denominated in a foreign currency. A "foreign currency debt" means a debt obligation denominated in a currency of a country other than Canada. Foreign currency debt on acquisition of control ITA 111(12) Under subsection 111(4) of the Act, a corporation that undergoes an acquisition of control is required to recognize, for income tax purposes, all of its accrued capital losses on property that the corporation owns at that time. Those newly-realized capital losses, together with the corporation’s existing net capital losses, cannot be used after the acquisition of control. The corporation can, however, elect to realize any accrued capital gains on other property that the corporation owns, allowing it to use some or all of its capital losses to offset those capital gains. Unlike other accrued capital gains and losses, capital gains and losses resulting from foreign currency fluctuations on a corporation’s debt liabilities have not been subject to these rules, even though in other respects the Act generally treats capital gains and losses realized in respect of foreign currency fluctuations like other capital gains and losses. New subsection 111(12) of the Act extends the general treatment of accrued capital gains and losses on an acquisition of control of a corporation to a corporation’s accrued capital gains and capital losses resulting from foreign currency fluctuations on debt liabilities denominated in a foreign currency. New subsection 111(12) provides that for the purposes of subsection 111(4), if at any time a corporation owes a foreign currency debt, the corporation is deemed to own, immediately before that time (referred to in these notes and in new subsection 111(12) as the "measurement time") , a property with an adjusted cost base (ACB) and fair market value (FMV) determined by the formulas contained in paragraphs 111(12)(a) and (b) respectively. Establishing an ACB and an FMV for this notional property allows for the calculation of capital losses or gains, as the case may be, in respect of the foreign currency debt. Under new paragraph 111(12)(a), the ACB of the notional property at the measurement time is determined by the formula: A + B – C A is the amount of principal owed by the corporation under the foreign currency debt at the measurement time (calculated, for greater certainty, using the exchange rate applicable at the measurement time). B is the portion of any gain previously recognized in respect of the foreign currency debt because of section 111 that is reasonably attributable to the principal owed by the corporation as described in A. C is the portion of any capital loss previously recognized in respect of the foreign currency debt because of section 111 that is reasonably attributable to the principal owed by the corporation as described in A. Under new paragraph 111(12)(b), the FMV of the notional property at the measurement time is the amount that would be the amount of the principal owed by the corporation under the foreign currency debt at the measurement time if that amount were calculated using the exchange rate applicable at the time of the original borrowing. New subsection 111(12) will apply to acquisitions of control that occur after March 7, 2008, other than an acquisition of control that occurs before 2009, where the persons acquiring control are obligated to acquire the control pursuant to the terms of an agreement in writing made by them on or before March 7, 2008. Corporations will also be able to elect to have new subsection 111(12) apply to acquisitions of control that occur after 2005. Additional Amount ITA 111(13) New subsection 111(13) of the Act provides that for the purposes of subsection 111(12) and subsections 40(10) and (11) of the Act, if the amount of principal owed by the corporation under the foreign currency debt (expressed in the foreign currency) immediately before the particular time exceeds the amount of principal owed by the corporation under the foreign currency debt (expressed in the foreign currency) immediately before the last time that subsection 111(12) applied to the corporation in respect of the foreign currency debt, the excess is deemed to be the amount of principal owed by the corporation under a separate foreign currency debt of the corporation. That is, new borrowings under an existing credit facility after an acquisition of control will be treated as a separate debt. New subsection 111(13) will apply to acquisitions of control that occur after March 7, 2008, other than an acquisition of control that occurs before 2009, where the persons acquiring control are obligated to acquire the control pursuant to the terms of an agreement in writing made by them on or before March 7, 2008. Corporations will also be able to elect to have new subsection 111(13) apply to acquisitions of control that occur after 2005. Clause 18 Charitable and other gifts ITA 118.1 Section 118.1 of the Act provides a tax credit in respect of an individual’s charitable gifts, Crown gifts, cultural gifts and ecological gifts. Direct designation – RRSPs, RRIFs and TFSAs ITA 118.1(5.3) Subsection 118.1(5.3) of the Act allows the proceeds of a deceased individual’s registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or tax-free savings account (TFSA) that are donated by way of a direct designation under the terms of the arrangement to a qualified donee to be claimed as a tax credit in computing the individual's tax for the year of death. To qualify, subsection 118.1(5.3) requires that the arrangement be an RRSP, a RRIF or a TFSA at the time of the transfer. Subsection 118.1(5.3) is amended to provide that, in the case of the donation of TFSA proceeds, the arrangement need be a TFSA only immediately before the individual’s death. This corrects a technical deficiency that arose from the fact that an arrangement ceases to be a TFSA on the death of the last holder (unlike an RRSP or a RRIF, which generally retains its character as such, after the death of the last annuitant, for as long as the arrangement remains in existence). This amendment applies to the 2009 and subsequent taxation years. Clause 19 SIFT trusts and SIFT partnerships ITA 122.1 Section 122.1 of the Act sets out rules that apply in respect of the taxation of specified investment flow-through (SIFT) trusts and, in some cases, SIFT partnerships. "SIFT trust" is defined in subsection 122.1(1), and "SIFT partnership" is defined in section 197 of the Act; both definitions are made by subsection 248(1) of the Act to apply for all purposes of the Act. Definitions ITA 122.1(1) Subsection 122.1(1) of the Act sets out a number of definitions that apply for the purposes of the rules for SIFT trusts and, in some cases, SIFT partnerships. The definitions in subsection 122.1(1) apply for the purposes of sections 104 and 122, as well as for the purposes of section 122.1. Subsection 122.1(1) is amended by adding several definitions and modifying a number of others. These amendments come into force on October 31, 2006. The following notes describe the new and amended definitions in alphabetical order. "equity" The new definition "equity" applies for purposes of the definitions "excluded subsidiary entity", and "publicly-traded liability". "Equity" means a share of a corporation, a beneficial interest in a trust, an interest as a member of a partnership, any of certain liabilities of an entity that are equity-like (as described in greater detail below), and a right to, or to acquire, any of the above. An equity-like liability of an entity means a liability of the entity (and, for the purpose of the definition "publicly-traded liability", a security of the entity that is a liability of another entity) if: • the liability is convertible into or exchangeable for equity of the entity or of another entity (including another equity-like debt of the entity or of another entity), or • the amount payable on the liability is contingent or dependent on the use of or production from property, or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable, or income or capital paid or payable to a member of a partnership or a beneficiary of a trust. "excluded subsidiary entity" The new definition "excluded subsidiary entity" is relevant to determining whether a trust or partnership will be a SIFT trust or SIFT partnership for a taxation year. In brief, a trust or partnership that is an excluded subsidiary entity is not a SIFT trust or SIFT partnership. As defined, an excluded subsidiary entity for a taxation year is an entity the equity (as defined in subsection 122.1(1)) of which meets two conditions at all times in the taxation year. The first condition is that the equity not be listed or traded on a stock exchange or other public market. The second condition is that the equity not be held by any person or partnership other than: a real estate investment trust, a taxable Canadian corporation, a SIFT trust or a SIFT partnership (ignoring the transitional rules that otherwise suspend for a period the definitions "SIFT trust" and SIFT partnership"), another excluded subsidiary entity for the taxation year, or any combination of these qualifying interest holders. "investment" As currently defined, "investment" in a trust or partnership is meant to cover a broad range of properties and rights. The definition is amended to exclude an unaffiliated publicly-traded liability of a trust or partnership. For more detail, readers may refer to the commentary on the new definition "unaffiliated publicly-traded liability". "non-portfolio property" Under its existing definition, a "non-portfolio property" of a trust or partnership is a property of any of three types. The first type of non-portfolio property is comprised of certain securities of a "subject entity". These are securities that, as described in paragraph (a) of the definition "non-portfolio property", either: • have a total fair market value that is greater than 10% of the equity value of the subject entity; or • make up — together with any securities that the trust or partnership holds of entities affiliated with the subject entity — more than 50% of the equity value of the trust or partnership. Paragraph (a) of the definition "non-portfolio property" is amended so that securities of a subject entity that is a portfolio investment entity are excluded from that paragraph. As a result that paragraph will not apply to make these securities non-portfolio property. However, securities of a portfolio investment entity may still be non-portfolio property of a trust or partnership under the remaining two types of non-portfolio property described in paragraphs (b) and (c) of the definition "non-portfolio property". For more detail, readers may refer to the commentary on the new definition "portfolio investment entity". "portfolio investment entity" The definition "portfolio investment entity" is added. A portfolio investment entity at any time is an entity that does not at that time hold any non-portfolio property. "publicly-traded liability" The new definition "publicly-traded liability" applies for purposes of the definition "unaffiliated publicly-traded liability". A publicly-traded liability of an entity means a liability that is a security of the entity that is not equity (as defined in the new definition "equity") of the entity and that is listed or traded on a stock exchange or other public market. For more detail, see the commentary on the new definitions "equity" and "unaffiliated publicly-traded liability". "qualified REIT property" The definition "qualified REIT property" applies in determining whether a trust is a real estate investment trust ("REIT") for purposes of the SIFT rules. In order to qualify as a REIT, a trust cannot hold any non-portfolio property other than qualified REIT property. The existing definition "qualified REIT property" describes four types of property. The first type is real or immovable property situated in Canada. The description of this type of qualified REIT property is amended to delete the words "situated in Canada". This amendment is part of a series of similar amendments intended to ensure that the geographic location of a trust’s real or immovable property will not be relevant in determining whether the trust is a REIT for purposes of the SIFT rules. The third type of qualified REIT property, described in paragraph (c) of the definition "qualified REIT property", consists of shares of the capital stock of a REIT’s nominee corporation; in effect, a corporation that acts as bare trustee and that holds individual real or immovable properties on behalf of the REIT. The description of this type of qualified REIT property is amended to extend qualified REIT property status to shares of a nominee corporation that acts as bare trustee, and that holds legal title to real or immovable property, on behalf of a wholly-owned subsidiary of the REIT. "real estate investment trust" A trust is a "real estate investment trust" (REIT) for a taxation year if it is resident in Canada throughout the year and meets a number of other conditions, including the requirement that the trust derive at least 75% of its revenues from rent from, and capital gains from the disposition of, Canadian real or immovable properties, and interest from mortgages on Canadian real or immovable properties. The provision setting out this 75% revenue requirement is amended to delete the words "situated in Canada". This amendment is part of a series of similar amendments intended to ensure that the geographic location of a trust’s real or immovable property will not be relevant in determining whether the trust is a REIT for purposes of the SIFT rules. Another condition for REIT status is that at each time in the relevant trust’s taxation year the total fair market values at that time of certain qualifying assets – real or immovable property situated in Canada, cash, and certain debt securities – must equal at least 75% of the trust’s equity value at that time. The provision describing this condition is amended in a number of ways. First, the words "situated in Canada" are deleted, such that qualifying assets will now include real or immovable property wherever situated. Secondly, the reference to "cash" is replaced with a reference to money (indirectly, by way of a reference to property described in paragraph (a) of the definition "qualified investment" in section 204 of the Act). Finally, the list of qualifying assets is expanded to include certain cash equivalents, such as bankers’ acceptances and certain deposits with financial institutions. "rent from real or immovable properties" "Rent from real or immovable properties" is currently defined to include rent or similar payments for the use of, or right to use, real or immovable properties, and payment for services ancillary to the rental of real or immovable properties and customarily supplied or rendered in connection with the rental of real or immovable properties. The definition is amended to include, as a taxpayer’s rent from real or immovable property, a payment out of the current income of a trust, but only to the extent that the payment is included in the recipient trust’s income and is paid from the part of the payer trust’s income that was derived from rent from real or immovable properties. "SIFT trust" A "specified investment flow-through trust" or "SIFT trust" for a taxation year means a trust that meets the following conditions at any time during the taxation year: it is resident in Canada, investments in it are listed or traded on a stock exchange or other public market, and it holds one or more non-portfolio properties. A real estate investment trust (REIT) is excluded from the definition of SIFT trust. The definition is amended to exclude from treatment as a SIFT trust for a taxation year an entity that is an excluded subsidiary entity for the taxation year. For more information, readers may refer to the commentary on the new definition "excluded subsidiary entity". "unaffiliated publicly-traded liability" The new definition "unaffiliated publicly-traded liability" is relevant to determining whether a liability is an investment in a trust or partnership. An unaffiliated publicly-traded liability of an entity at any time means a publicly-traded liability of the entity if at that time at least 90% (measured by fair market value) of all of the publicly-traded liabilities of the entity are held by persons or partnerships that are not affiliated with the entity. Clause 20 Investment Tax Credits ITA 127 Section 127 of the Act permits deductions in computing tax payable in respect of logging taxes, political contributions and investment tax credits (ITCs). Transitional application of investment tax credit definition ITA 127(9.01)(b) Subsection 127(9.01) of the Act provides for a substitution of the number of taxation years referenced in paragraphs (c) to (f), (h) and (i) in the definition "investment tax credit" in subsection 127(9) of the Act in order to provide for a maximum 20-year carry-forward period for investment tax credits earned in the 2006 and subsequent taxation years. Paragraph 127(9.01)(b) is amended to change the reference to "2005" to "1997". This amendment in effect extends the maximum 20-year carry-forward to amounts from the 1998 to 2005 taxation years. This amendment applies to the 2008 and subsequent taxation years. ITA 127(9.02)(b) Subsection 127(9.02) of the Act provides for a substitution of the number of taxation years referenced in paragraph (g) in the definition "investment tax credit" in subsection 127(9) of the Act in order to provide for a maximum 20-year carry-forward period for investment tax credits earned in the 2006 and subsequent taxation years. Paragraph 127(9.02)(b) is amended to change the reference to "2005" to "1997". This amendment is part of the extension of the maximum 20-year carry-forward to amounts from the 1998 to 2005 taxation years. This amendment applies to 2008 and subsequent taxation years. Expenditure limit determined ITA 127(10.2) Subsection 127(10.1) of the Act provides an additional 15% ITC (enhanced ITC) to Canadian-controlled private corporations (CCPCs), based on the least of: the amount that the corporation claims (paragraph 127(10.1)(a)), the corporation's SR&ED qualified expenditure pool (paragraph 127(10.1)(b)) and the corporation's expenditure limit (paragraph 127(10.1)(c)). The expenditure limit of a corporation for a particular taxation year is an amount from nil to$3 million, as determined by a formula set out in subsection 127(10.2). The formula includes two variables: the taxable income and the taxable capital employed in Canada of the corporation and its associated corporations, if any, for the preceding taxation year. The effects of these variables are that a corporation's $3 million maximum expenditure limit decreases by$10 for each dollar of taxable income over $400,000 in the preceding taxation year. The resulting figure is further reduced in proportion to any taxable capital employed in Canada of the corporation in excess of$10 million. This restriction ensures that the expenditure limit of the corporation is reduced $3 for every$40 in taxable capital employed in Canada in excess of $10 million. For this purpose, the taxable capital employed in Canada by the corporation has the meaning assigned by section 181.2 of the Act and includes the taxable capital employed in Canada in the year of any associated corporation. Subparagraphs (a)(i) and (ii) of the description of B in the formula in subsection 127(10.2) are amended to add a reference to section 181.3. If a corporation is a financial institution, its taxable capital employed in Canada is described in subsection 181.3. Therefore this amendment ensures the correct measurement, for the purposes of the formula in subsection 127(10.2), of the taxable capital employed in Canada by a CCPC that is a financial institution. These amendments generally apply to taxation years that end on or after February 26, 2008. For a taxation year that includes February 26, 2008, any increase in the expenditure limit is pro-rated based on the number of days in that taxation year that are after February 25, 2008. Expenditure limit – associated CCPCs ITA 127(10.22) Subsection 127(10.22) of the Act provides a special relieving rule that can apply for the purpose of calculating a corporation's expenditure limit for a particular taxation year under subsection 127(10.2) of the Act. If subsection 127(10.22) applies to a particular corporation in respect of another corporation, the particular corporation is considered not to be associated with the other corporation for the purpose of determining the particular corporation's expenditure limit under subsection 127(10.2), nor for the purpose of determining the particular corporation's business limit under section 125 (as applied for the purpose only of determining the particular corporation's expenditure limit under subsection 127(10.2)). This reference to the corporation’s business limit is no longer required, since the formula for the calculation of the corporation’s expenditure limit under subsection 127(10.2), as modified by S.C. 2008, c. 28 (the Budget Implementation Act, 2008), no longer relies upon the corporation’s business limit. Subsection 127(10.22) of the Act is therefore amended to remove the reference . Amended subsection 127(10.22) applies to taxation years that end on or after March 9, 2009. This is because, for a taxation year that includes February 26, 2008, any increase in the expenditure limit is pro-rated based on the number of days in that taxation year that are after February 25, 2008. No such taxation year could end after March 8, 2009. Expenditure limit determination in certain cases ITA 127(10.6)(c) Subsection 127(10.6) of the Act provides for the increase (a "gross-up") of a CCPC's taxable income and business limit where the CCPC’s taxation year is less than 51 weeks, which gross-up is relevant in determining the CCPC's expenditure limit for a taxation year under subsection 127(10.2) and paragraph 127(10.6)(b). Paragraph 127(10.6)(c) is amended to remove the reference to a corporation’s business limit, because the new formula for the calculation of the corporation’s expenditure limit under subsection 127(10.2) of the Act no longer relies upon the corporation’s business limit. Amended paragraph 127(10.6)(c) applies to taxation years that end on or after March 9, 2009. For a taxation year that includes February 26, 2008, any increase in the expenditure limit is pro-rated based on the number of days in that taxation year that are after February 25, 2008. No such taxation year could end after March 8, 2009. Transitional application of investment tax credit recapture ITA 127(36)(b) Subsection 127(36) of the Act provides for a substitution of the number of taxation years and fiscal periods referenced in subsections 127(27), (28) (29), (34) and (35) of the Act, which concern the recapture of investment tax credits in certain circumstances. Paragraph 127(36)(b) is amended to change the reference to "2005" to "1997". This ensures a maximum 20-year recapture period for investment tax credits earned in the 1998 and subsequent taxation years, and is part of the extension of the maximum 20-year carry-forward to amounts from those taxation years. This amendment applies to the 2008 and subsequent taxation years. Clause 21 Refundable Investment Tax Credits ITA 127.1 Section 127.1 of the Act provides for the refundability of investment tax credits under certain circumstances. A qualifying corporation may be eligible for either a 40% or 100% refund for its investment tax credits depending on the nature of its expenditures. "qualifying corporation" "qualifying income limit" ITA 127.1(2) Subsection 127.1(2) of the Act sets out definitions relevant for the purposes of section 127. 1. Subsection 127.1(2) is amended in two respects - the definition of "qualifying corporation" is replaced and a new definition of "qualifying income limit" is introduced. Under the current definition, a "qualifying corporation" is, for a particular taxation year, a Canadian-controlled private corporation (CCPC) the taxable income of which for its preceding taxation year together with the taxable incomes of all associated corporations for their preceding taxation years does not exceed the total of the business limits (as determined under section 125 of the Act) of the corporation and its associated corporations for those preceding years.[3] The definition of "qualifying corporation" is amended to replace the references to business limit with a reference to the "qualifying income limit". Under the amended definition, a qualifying corporation for a particular taxation year is a CCPC the taxable income of which for its preceding taxation year, together with the taxable incomes of all associated corporations for their preceding taxation years, does not exceed the qualifying income limit of the corporation. The new definition "qualifying income limit" of a corporation in subsection 127.1(2) of the Act is relevant for the purposes of the definition "qualifying corporation." The qualifying income limit of a corporation is determined by a formula ––$400,000 x [($40 million – A )/$40 million ] –– which no longer relies upon the business limit determined under section 125 of the Act.

The amount described in the formula as A is nil if the corporation’s taxable capital employed in Canada is less than or equal to $10 million. In any other case, A is equal to the excess of the corporation’s taxable capital employed in Canada over$10 million. For this purpose, the taxable capital employed in Canada by the corporation has the meaning assigned by section 181.2 or 181.3 of the Act and includes the taxable capital employed in Canada in the year of any associated corporation.

The amended definition of "qualifying corporation" applies to taxation years that end on or after February 26, 2008. The new definition of "qualifying income limit" generally applies to taxation years that end on or after February 26, 2008. For a taxation year that includes February 26, 2008, the amount by which the new amount calculated for the qualifying income limit exceeds the business limit as described in the old definition of the qualifying corporation is pro-rated based on the number of days in that taxation year that are after February 25, 2008.

Clause 22

Former resident – replaced shares

ITA
128.3

Under the taxpayer migration rules in section 128.1 of the Act, the post-departure disposition of a property can have important tax consequences for an emigrant individual. Section 128.3 of the Act allows for a deferral of these consequences in certain circumstances, by deeming the individual not to have disposed of shares that were converted to new shares under section 51 of the Act, or subject to a share for share exchange, reorganization or amalgamation under any of sections 85.1, 86 or 87 of the Act. Section 128.3 also deems the share received by an individual to be the same as the old share for the purposes of section 119 and subsections 126(2.21) to (2.23), 128.1(6) to (8), 180.1(1.4) and 220(4.5) and (4.6).

Section 128.3 is amended to add to the list of specified provisions providing for tax-deferred share exchanges a reference to new subsection 85.1(7) of the Act. Subsection 85.1(7) provides, where a number of conditions are met, for a tax-deferred exchange of SIFT wind-up entity equity in exchange for a share of a taxable Canadian corporation.

This amendment to section 128.3 is part of a series of amendments intended to provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity.

This amendment applies after December 19, 2007.

Clause 23

Qualifying Exchange

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, provided that the transferee fund is a mutual fund trust. The merger is accomplished in part through a transfer of property from one fund (the "transferor fund") to the other (the "transferee fund"),

Definitions

ITA
132.2(2)

"qualifying exchange"

The definition "qualifying exchange" in subsection 132.2(2) of the Act is amended to ensure that it does not apply if the transferor fund is a SIFT wind-up corporation. Because of a related amendment to paragraph 87(2)(s.1) of the Act, a SIFT wind-up corporation includes a corporation that results from an amalgamation (within the meaning assigned by subsection 87(1)) of corporations one of which is a SIFT wind-up corporation or from the winding-up of a SIFT wind-up corporation into its parent in circumstances to which subsection 88(1) of the Act applies.

This amendment applies after Announcement Date.

Clause 24

Cooperative corporations

ITA
136

Section 136 of the Act defines the term "cooperative corporation" and provides that a cooperative corporation is, except for certain purposes, deemed not to be a private corporation.

Indirect shareholdings – TFSAs

ITA
136(2)

Subsection 136(2) of the Act sets out conditions that a corporation must meet in order to be a cooperative corporation. The condition in paragraph 136(2)(d) requires at least 90% of the corporation’s shares, if any, to be held by its members who are individuals, other cooperative corporations, or corporations or partnerships that carry on the business of farming. For this purpose, any shares that are held by the members indirectly through their RRSPs, RRIFs or registered education savings plans (RESPs) are counted in the same way as though held by the members directly.

Paragraph 136(2)(d) is amended to extend the special rule for indirect  shareholdings so that it applies to shares held in TFSAs.

This amendment applies to the 2009 and subsequent taxation years.

Clause 25

Insurance Corporations

ITA
138

Section 138 of the Act sets out detailed rules relating to the taxation of insurance corporations. Section 138 is amended to provide transitional rules for insurers in respect of their life insurance businesses as a result of changes to accounting rules.

The new transitional rules in section 138 are intended to ensure that any increase or decrease in the reserves of an insurer resulting from these accounting changes will be taken into account in computing income for tax purposes over a five-year period. As such, they generally replicate the effect of new sections 12.5 and 20.4 of the Act, with appropriate modifications to reflect their application to life insurers. Instead of providing what would be largely repetitious specific descriptions of the new rules in section 138, the following table sets out these correspondences.

 Subject Section 138 amendment Compare to Definitions "base year", "reserve transition amount", "transition year" 138(12) 12.5(1) Transition year income inclusion 138(16) 12.5(2) Transition year income deduction 138(17) 20.4(2) Transition year income inclusion reversal 138(18) 20.4(3) Transition year income deduction reversal 138(19) 12.5(3) Winding-up 138(20) 12.5(4) Amalgamations 138(21) 12.5(5) Transfer of business 138(22), (23) 12.5(6), (7) Ceasing to carry on business 138(24) 12.5(8), 20.4(4) Ceasing to exist 138(25) 12.5(9)

Application of financial institution rules

ITA
138(10)

Subsection 138(10) of the Act provides that, in computing the income of a life insurer that carries on business in Canada and outside of Canada from its insurance business carried on in Canada, the financial institution rules in sections 142.2 to 142.5 apply only in respect of the insurer’s designated insurance property in respect of the business.

Subsection 138(10) is amended to add a reference to new section 142.51 of the Act. New section 142.51 provides transitional rules for financial institutions as a result of changes to accounting rules that may result in changes to the manner in which these financial institutions calculate their income under sections 142.2 to 142.6. For more detail readers may refer to the commentary on subsection 142.51.

This amendment applies to taxation years that begin on or after October 1, 2006.

Clause 26

Definitions

ITA
142.2

Sections 142.2 to 142.6 of the Act contain rules for the tax treatment of most shares and debt obligations held by financial institutions. Subsection 142.2 of the Act defines several terms for the purposes of these sections (and in other provisions of the Act).

Definitions

ITA
142.2(1)

Subsection 142.2(1) of the Act defines several terms for the purposes of the rules in sections 142.2 to 142.6 of the Act relating to securities held by financial institutions. Subsection 142.2(1) is amended by modifying some of the existing definitions and by adding new ones.

"excluded property"

The new definition "excluded property" subsection 142.2(1) identifies property specifically exempted from classification as "mark-to-market property" for purposes of the rules in sections 142.2 to 142.6 of the Act.

Under this new definition, excluded property of a taxpayer for a taxation year is property, held at any time in the taxation year by the taxpayer, that is

• a share of a corporation if, at any time in the taxation year, the taxpayer has a significant interest in the corporation,
• a property that is, at all times in the taxation year at which the taxpayer held the property, a prescribed payment card corporation share of the taxpayer,
• if the taxpayer is an investment dealer, a property that is, at all times in the taxation year at which the taxpayer held the property, a prescribed securities exchange investment of the taxpayer,
• a share of a corporation if
• control of the corporation is, at any time (the "acquisition of control time") in the 24-month period that begins immediately after the end of the year, acquired by
• the taxpayer,
• one or more persons related to the taxpayer (otherwise than by reason of a right referred to in paragraph 251(5)(b) of the Act), or
• the taxpayer and one or more persons related to the taxpayer (otherwise than by reason of a right referred to in paragraph 251(5)(b)), and
• the taxpayer elects in writing that this provision apply and files the election with the Minister of National Revenue on or before the taxpayer’s filing-due date for the taxpayer’s taxation year that includes the acquisition of control time, or
• a prescribed property.

The definition "excluded property" applies to taxation years that begin on or after October 1, 2006.

"fair value property"

The new definition "fair value property" in subsection 142.2(1) is relevant to determining whether a tracking property or a specified debt obligation is mark-to-market property (as those expressions are defined in subsection 142.2(1)). Fair value property of a taxpayer for a taxation year is defined as property, held at any time in the taxation year by the taxpayer, that is — or it is reasonable to expect would, if the taxpayer held the property at the end of the taxation year, be — valued (otherwise than solely because its fair value was less than its cost to the taxpayer or, if the property is a specified debt obligation, because of a default of the debtor) in accordance with generally accepted accounting principles, at its fair value (determined in accordance with those principles) in the taxpayer's balance sheet as at the end of the taxation year.

This definition applies to taxation years that begin on or after October 1, 2006.

"mark-to-market property"

The existing definition "mark-to-market property" in subsection 142.2(1) is amended consequential to changes in accounting rules.

Specifically, the definition "mark-to-market property" is amended to reflect the addition of the new definitions "excluded property", "fair value property" and "tracking property" in subsection 142.2(1). As well, properties specifically excluded from treatment as mark-to-market property have been removed from the definition and will now be listed in the new definition "excluded property" in subsection 142.2(1). (For more detail, readers may refer to the commentary on that definition.)

In conjunction with the addition of the term "fair value property" it should be noted that a specified debt obligation held by a taxpayer (other than an investment dealer) will be mark-to-market property of the taxpayer where it is fair value property of the taxpayer for the taxation year, regardless of the taxpayer’s treatment of the property in previous taxation years.

Property qualifying as tracking property is added as mark-to-market property to ensure that a financial institution will not be able to avoid mark-to-market treatment on properties by investing through an intermediary or through the use of another financial instrument (such as a derivative). For more detail, readers may refer to the commentary on the definition "tracking property" in subsection 142.2(1).

As a result of these changes to the definition, mark-to-market property of a taxpayer for a taxation year will be property (other than an excluded property) held at any time in the taxation year by the taxpayer that is

• a share,
• if the taxpayer is not an investment dealer, a specified debt obligation that is a fair value property of the taxpayer for the taxation year,
• if the taxpayer is an investment dealer, a specified debt obligation, and
• a tracking property of the taxpayer that is a fair value property of the taxpayer for the taxation year,

These amendments apply to taxation years that begin on or after October 1, 2006, except that, for taxation years that begin before November 7, 2007, mark-to-market property does not include tracking property.

In addition to the above amendments, the definition "mark-to-market property" is also amended, for taxation years that end after February 22, 1994, to exclude the following property from treatment as mark-to-market property:

• property that is, at every time in the year at which the taxpayer holds the property, a prescribed payment card corporation share of the taxpayer,
• if the year begins after 1998 and the taxpayer is an investment dealer, a property that is, at every time in the year at which the taxpayer holds the property, a prescribed securities exchange investment of the taxpayer, and
• a share of a corporation held, at any time in the year, by the taxpayer if
• control of the corporation is, at any time (referred to in this paragraph as the "acquisition of control time") that is after 2001 and is in the 24-month period that begins immediately after the end of the year, acquired by
• the taxpayer,
• one or more persons related to the taxpayer (otherwise than by reason of a right referred to in paragraph 251(5)(b) of the Act), or
• the taxpayer and one or more such persons, and
• the taxpayer elects in writing and files the election with the Minister of National Revenue on or before the taxpayer’s filing-due date for the taxpayer’s taxation year that includes the acquisition of control time.

"tracking property"

The new definition "tracking property" in subsection 142.2(1) of the Act applies in determining whether property is a mark-to-market property of a taxpayer. Under this definition, property is tracking property of a taxpayer if the fair market value of the property is determined primarily by reference to one or more specified criteria in respect of property (referred to in this definition as "tracked property") that, if owned by the taxpayer, would be mark-to-market property of the taxpayer. The specified criteria are the fair market value of the tracked property, the profits or gains from the disposition of the tracked property, the revenue, income or cash flow from the tracked property, or any other similar criteria in respect of the tracked property.

This definition applies to taxation years that begin on or after October 1, 2006.

Significant interest

ITA
142.2(2)

The definition "mark-to-market property" in subsection 142.2(1) of the Act excludes a share of a corporation in which a taxpayer has a significant interest. Subsections 142.2(2) to (5) of the Act contain the definition "significant interest" and related rules.

Subsection 142.2(2) of the Act provides that a taxpayer has a significant interest in a corporation at any time if the taxpayer is related to the corporation at that time (ignoring any rights described in paragraph 251(5)(b) of the Act) or if the taxpayer holds shares of the corporation carrying at least 10% of the votes, and representing at least 10% of the fair market value, of all issued shares of the corporation.

For greater certainty, subsection 142.2(2) is amended to specifically provide that it applies for the purposes of the definitions "excluded property" and "specified debt obligation" in subsection 142.2(1).

This amendment applies to taxation years that begin on or after October 1, 2006.

Extended meaning of "related"

ITA
142.2(4)

Subsection 142.2(4) of the Act extends the concept of relatedness (as defined in section 251 of the Act) for the purpose of establishing whether a taxpayer has a significant interest in a corporation. Subsection 142.2(4) identifies a number of assumptions to apply in conjunction with section 251 in determining whether a person or partnership is related to any other person or partnership.

Subsection 142.2(4) is amended to provide that, for the purposes of subsections 142.2(2) to (4), in determining if, at a particular time, a person or partnership is related to another person or partnership, the rules in section 251 are to be applied as if,

• a partnership were a corporation having capital stock of a single class divided into 100 issued shares and each member of the partnership owned, at the particular time, that proportion of the issued shares of that class that the fair market value of the member’s partnership interest in the partnership at the particular time is of the fair market value of all partnership interests in the partnership at the particular time, and
• a trust were a corporation having capital stock of a single class divided into 100 issued shares and each beneficiary under the trust owned, at the particular time, that proportion of the issued shares of that class that the fair market value of the beneficiary’s beneficial interest in the trust at the particular time is of the fair market value at that time of all beneficial interest in the trust.

The above rules will not apply to a partnership or a trust in respect of which any amount of the income or capital of the partnership or trust that any entity may receive directly from the partnership or trust at any time as a member of the partnership or beneficiary under the trust depends on the exercise by any entity of, or the failure by any entity to exercise, a discretionary power.

This amendment applies to taxation years that begin on or after October 1, 2006.

Clause 27

Marked-to market

ITA
142.5

Section 142.5 of the Act requires shares and certain debt obligations to be marked to market each year, and puts the profit or loss on income account.

Rules applicable to first deemed disposition of debt obligation

ITA
142.5(8.1) and (8.2)

New subsection 142.5(8.2) of the Act applies to a taxpayer for the taxpayer’s first taxation year that begins on or after October 1, 2006 (the "first taxation year") where

• subsection 142.5(2) deems the taxpayer to have disposed of a particular specified debt obligation immediately before the end of the first taxation year (the "particular disposition"), and
• the particular specified debt obligation was owned by the taxpayer at the end of the taxation year immediately preceding the first taxation year and was not a mark-to-market property of the taxpayer for that preceding taxation year.

Where subsection 142.5(8.2) applies to a taxpayer for the first taxation year, the following rules apply to the taxpayer in respect of the particular disposition:

• subsection 20(21) of the Act does not apply to the taxpayer in respect of the particular disposition, and
• if section 12.4 of the Act does not apply to the taxpayer in respect of the particular disposition, there shall be included in computing the taxpayer’s income for the first taxation year the amount, if any, by which
• the total of all amounts each of which is
• an amount deducted under paragraph 20(1)(l) of the Act in respect of the particular specified debt obligation of the taxpayer in computing the taxpayer’s income for the taxation year immediately preceding the first taxation year,
• an amount deducted under paragraph 20(1)(p) of the Act in respect of the particular specified debt obligation of the taxpayer in computing the taxpayer’s income for a taxation year that preceded the first taxation year,

exceeds

• the total of all amounts each of which is
• an amount included under paragraph 12(1)(d) of the Act in respect of the particular specified debt obligation of the taxpayer in computing the taxpayer’s income for the first taxation year, or
• an amount included under paragraph 12(1)(i) of the Act in respect of the particular specified debt obligation of the taxpayer in computing the taxpayer’s income for the first taxation year or a preceding taxation year.

Clause 28

Transition

ITA
142.51

New section 142.51 of the Act provides transitional rules for financial institutions as a result of changes to accounting rules.

New section 142.51 is part of a package of amendments involving also sections 12.5, 20.4 and 138 of the Act.

Definitions

ITA
142.51(1)

New subsection 142.51(1) of the Act contains definitions that apply for the purposes of section 142.51.

The definitions in subsection 142.51(1) apply to taxation years that begin on or after October 1, 2006.

"base year"

The new definition "base year" in subsection 142.51(1) provides that the base year of a taxpayer is the taxpayer’s taxation year that immediately precedes its transition year. Certain amounts determined in respect of the taxpayer’s base year are relevant to determining the taxpayer’s transition amount, as described in greater detail below.

"transition amount"

The "transition amount" of a taxpayer for the taxpayer’s transition year is defined as the positive or negative amount determined by the formula A – B.

In applying the formula, element A is the total of all amounts each of which is the fair market value, at the end of the taxpayer’s base year, of a transition property of the taxpayer.

Element B is the total of all amounts each of which is the cost amount to the taxpayer, at the end of the taxpayer’s base year, of a transition property of the taxpayer.

"transition property"

A "transition property" of a taxpayer is defined as a property that

• was a specified debt obligation held by the taxpayer at the end of the taxpayer’s base year,
• was not a mark-to-market property of the taxpayer for the taxpayer’s base year, but would have been a mark-to-market property of the taxpayer for the taxpayer’s base year if the property had been carried at the property’s fair market value in the taxpayer’s balance sheet as at the end of each taxation year of the taxpayer that ends after the taxpayer last acquired the property (otherwise than by reason of a reacquisition under subsection 142.5(2)) and before the commencement of the taxpayer’s transition year, and
• was a mark-to-market property of the taxpayer for the transition year of the taxpayer.

"transition year"

The "transition year" of a taxpayer is defined as the taxpayer’s first taxation year that begins after September 30, 2006.

Transition year income inclusion

ITA
142.51(2)

New subsection 142.51(2) of the Act provides that, if a taxpayer is a financial institution in its transition year, the taxpayer must include in computing its income, for its transition year, the absolute value of the negative amount, if any, of the taxpayer’s transition amount for its transition year.

For further details, readers may refer to the commentary to the definition of "transition amount" and "transition property" in proposed subsection 142.51(1) of the Act.

New subsection 142.51(2) applies to taxation years that begin on or after October 1, 2006.

Transition year income deduction

ITA
142.51(3)

New subsection 142.51(3) of the Act provides that, if a taxpayer is a financial institution in its transition year, the taxpayer must deduct in computing its income, for its transition year, the positive amount, if any, of its transition amount for its transition year.

For further details, readers may refer to the commentary to the definition of "transition amount" and "transition property" in proposed subsection 142.51(1) of the Act.

New subsection 142.51(3) applies to taxation years that begin on or after October 1, 2006.

Transition year income inclusion reversal

ITA
142.51(4)

New subsection 142.51(4) of the Act provides that, where an amount has been included under subsection 142.51(2) of the Act in computing a taxpayer’s income for its transition year, there is to be deducted in computing the taxpayer’s income for each particular taxation year of the taxpayer that ends after the beginning of the transition year and in which the taxpayer is a financial institution, the amount determined by the formula

A x B/1825

where

A is the amount included under subsection 142.51(2) in computing the taxpayer’s income for the transition year, and

B is the number of days in the particular taxation year that are before the day that is 1825 days after the first day of the transition year.

New subsection 142.51(4) applies to taxation years that begin on or after October 1, 2006.

Transition year income deduction reversal

ITA
142.51(5)

New subsection 142.51(5) of the Act provides that, where an amount has been deducted under subsection 142.51(3) of the Act in computing the taxpayer’s income for its transition year, there is to be included in computing the taxpayer’s income, for each particular taxation year of the taxpayer that ends after the beginning of the transition year and in which the taxpayer is a financial institution, the amount determined by the formula

A x B/1825

where

A is the amount deducted under subsection 142.51(3) in computing the taxpayer’s income for the transition year, and

B is the number of days in the particular taxation year that are before the day that is 1825 days after the first day of the transition year.

New subsection 142.51(5) applies to taxation years that begin on or after October 1, 2006.

Winding-up

ITA
142.51(6)

New subsection 142.51(6) of the Act is one of a series of special rules contained in subsections 142.51(6) to (12) that provide for the appropriate treatment of a taxpayer’s transition amounts in circumstances in which the taxpayer or its business, as the case may be, has been transferred, reorganized or ended.

New subsection 142.51(6) provides that, where a taxpayer has (in a winding-up to which subsection 88(1) of the Act has applied) been wound-up into another corporation (the "parent"), and immediately after the winding-up the parent is a financial institution, in applying subsections 142.51(4) and (5) of the Act in computing the income of the taxpayer and that of the parent for particular taxation years that end on or after the first day (the "start day") on which assets of the taxpayer were distributed to the parent on the winding-up,

• the parent is, on and after the start day, deemed to be the same corporation as and a continuation of the taxpayer in respect of
• any amount included under subsection 142.51(2) of the Act or deducted under subsection 142.51(3) of the Act by the taxpayer in computing the taxpayer’s income for its transition year,
• any amount deducted under subsection 142.51(4) or included under subsection 142.51(5) in computing the taxpayer’s income for a taxation year of the taxpayer that begins before the start day, and
• any amount that, in the absence of subsection 142.51(6) — and assuming that the taxpayer is a financial institution on each day (that is the start day or a subsequent day) that the parent is a financial institution — would be required to be deducted or included, in respect of days that are on or after the start day, under subsection 142.51(4) or (5) in computing the taxpayer’s income for its transition year, and
• the taxpayer is, in respect of each of its particular taxation years, to determine the value for B in the formulas in subsections 142.51(4) and (5) without reference to the start day and days after the start day.

New subsection 142.51(6) applies to taxation years that begin on or after October 1, 2006.

Amalgamations

ITA
142.51(7)

New subsection 142.51(7) of the Act is one of a series of special rules contained in subsections 142.51(6) to (12) that provide for the appropriate treatment of a taxpayer’s transition amounts in circumstances in which the taxpayer or its business, as the case may be, has been transferred, reorganized or ended.

Subsection 142.51(7) provides that, where there is an amalgamation (within the meaning assigned by subsection 87(1) of the Act) of a taxpayer with one or more other corporations to form one corporation (referred to in this subsection as the "new corporation"), and immediately after the winding-up the new corporation is a financial institution, in applying subsections 142.51(4) and (5) of the Act in computing the income of the new corporation for particular taxation years of the new corporation that begin on or after the day on which the amalgamation occurred, the new corporation is, on and after that day, deemed to be the same corporation as and a continuation of the taxpayer in respect of

• any amount included under subsection 142.51(2) of the Act or deducted under subsection 142.51(3) of the Act in computing the taxpayer’s income for its transition year of the taxpayer,
• any amount deducted under subsection 142.51(4) or included under subsection 142.51(5) in computing the taxpayer’s income for a taxation year of the taxpayer that begins before the day on which the amalgamation occurred, and
• any amount that, in the absence of subsection 142.51(7) — and assuming that the taxpayer is a financial institution on each day (that is the day on which the amalgamation occurred or a subsequent day) that the new corporation is a financial institution — would be required to be included or deducted, in respect of any of those days, under subsection 142.51(4) or (5) in computing the taxpayer’s income.

New subsection 142.51(7) applies to taxation years that begin on or after October 1, 2006.

ITA
142.51(8) and (9)

New subsections 142.51(8) and (9) of the Act are part of a series of special rules contained in subsections 142.51(6) to (12) that provide for the appropriate treatment of a taxpayer’s transition amounts in circumstances in which the taxpayer or its business, as the case may be, has been transferred, reorganized or ended.

Subsection 142.51(8) provides that subsection 142.51(9) applies if, at a particular time, a taxpayer (the "transferor") transfers, to a related corporation (the "transferee"), property in respect of a business carried on by the transferor in Canada (the "transferred business") and

• subsection 138(11.5) or (11.94) of the Act applies to the transfer, or
• subsection 85(1) of the Act applies to the transfer, the transfer includes all or substantially all of the property and liabilities of the transferred business and, immediately after the transfer, the transferee is a financial institution.

In these circumstances, subsection 142.51(9) provides that in respect of the transfer:

• the transferee is, at and after the particular time, deemed to be the same corporation as and a continuation of the transferor in respect of
• any amount included under subsection 142.51(2) of the Act or deducted under subsection 142.51(3) of the Act in computing the transferor’s income for its transition year that can reasonably be attributed to the transferred business,
• any amount deducted under subsection 142.51(4) or included under subsection 142.51(5) in computing the transferor’s income for a taxation year of the transferor that begins before the particular time that can reasonably be attributed to the transferred business, and
• any amount that — in the absence of subsection 142.51(9) and assuming that the transferor is a financial institution on each day (that includes that time or is a subsequent day) that the transferee is a financial institution — would be required to be deducted or included, under subsection 142.51(4) or (5) in computing the transferor’s income that can reasonably be attributed to the transferred business, and
• in determining, in respect of the day that includes the particular time or any subsequent day, any amount that is required under subsection 142.51(4) or (5) to be deducted or included in computing the transferor’s income for each particular taxation year from the transferred business, the description of A in the formulas in those subsections is deemed to be nil.

New subsections 142.51(8) and (9) apply to taxation years that begin on or after October 1, 2006.

Transfer to new partnership

ITA
142.51(10)

New subsection 142.51(10) of the Act is one of a series of special rules contained in subsections 142.51(6) to (12) that provide for the appropriate treatment of a taxpayer’s transition amounts in circumstances in which the taxpayer or its business, as the case may be, has been transferred, reorganized or ended.

Subsection 142.51(10) provides that, if subsection 98(6) of the Act deems a partnership (the "new partnership") to be a continuation of another partnership (the "predecessor partnership"), and at the time that is immediately after the predecessor partnership ceases to exist, the new partnership is a financial institution, in applying subsections 142.51(4) and (5) of the Act in computing the income of the new partnership for particular taxation years of the new partnership that begin on or after the day on which the new partnership comes into existence, the new partnership is, in respect of those days, deemed to be the same partnership as and a continuation of the predecessor partnership in respect of

• any amount included under subsection 142.51(2) of the Act or deducted under subsection 142.51(3) of the Act in computing the predecessor partnership’s income for its transition year,
• any amount deducted under subsection 142.51(4) or included under subsection 142.51(5) in computing the predecessor partnership’s income for a taxation year of the predecessor partnership that begins before the day on which the new partnership comes into existence, and
• any amount that, in the absence of subsection 142.51(10) — and assuming that the predecessor partnership is a financial institution on each day (that is the day on which the new partnership comes into existence or a subsequent day) that the new partnership is a financial institution — would be required to be deducted or included, in respect of days that are on or after the day on which the new partnership comes into existence, under subsection 142.51(4) or (5) in computing the predecessor partnership’s income.

New subsection 142.51(10) applies to taxation years that begin on or after October 1, 2006.

ITA
142.51(11)

New subsection 142.51(11) of the Act is one of a series of special rules contained in subsections 142.51(6) to (12) that provide for the appropriate treatment of a taxpayer’s transition amounts in circumstances in which the taxpayer or its business, as the case may be, has been transferred, reorganized or ended.

Subsection 142.51(11) applies if at a particular time a taxpayer ceases to be a financial institution.

In these circumstances, the subsection requires that the taxpayer deduct, in computing its income for its taxation year that includes the time that is immediately before the particular time, the amount determined by the formula A-B. Element A of the formula is the amount included under subsection 142.51(2) of the Act in computing the taxpayer’s income for its transition year. Element B of the formula is the total of all amounts each of which is an amount deducted under subsection 142.51(4) of the Act in computing the income of the taxpayer for a taxation year that began before the particular time.

The subsection can also apply, where a taxpayer ceases at a particular time to be a financial institution, to require the taxpayer to include in computing its income for the taxation year of the taxpayer that includes the time that is immediately before the particular time the amount determined by the formula C – D. Element C of this formula is the amount deducted under subsection 142.51(3) of the Act in computing the taxpayer’s income for its transition year. Element D of the formula is the total of all amounts each of which is an amount included under subsection 142.51(5) of the Act in computing the taxpayer’s income for a taxation year that began before the particular time.

Readers may also refer to the commentary for subsection 142.51(12) of the Act.

New subsection 142.51(11) applies to taxation years that begin on or after October 1, 2006.

ITA
142.51(12)

New subsection 142.51(12) of the Act is one of a series of special rules contained in subsections 142.51(6) to (12) that provide for the appropriate treatment of a taxpayer’s transition amounts in circumstances in which the taxpayer or its business, as the case may be, has been transferred, reorganized or ended.

Subsection 142.51(12) provides that, where at any time a taxpayer that carried on a business ceases to exist (otherwise than as a result of a merger to which subsection 87(2) of the Act applies, a winding-up to which subsection 88(1) of the Act applies or a continuation to which subsection 98(6) of the Act applies), for the purposes of subsection 142.51(11) of the Act, the taxpayer is deemed to have ceased to be a financial institution at the earlier of

• the time (determined without reference to this subsection) at which the taxpayer ceased to be a financial institution, and
• the time that is immediately before the end of the last taxation year of the taxpayer that ended at or before the time at which the taxpayer ceased to exist.

New subsection 142.51(12) applies to taxation years that begin on or after October 1, 2006.

Clause 29

Securities held by financial institutions

ITA
142.6

Section 142.6 of the Act contains rules dealing with special situations involving securities held by financial institutions.

Change in status — prescribed payment card corporation share

ITA
142.6(1.4)

New subsection 142.6(1.4) of the Act applies where a property ceases, at a particular time in a taxation year, to be a prescribed payment card corporation share of a taxpayer and, as a result, becomes mark-to-market property of the taxpayer for the taxation year. In these circumstances, subsection 142.6(1.4) deems the taxpayer

• to have disposed of the property (this being a disposition to which subsection 142.5(1) of the Act does not apply) immediately before the particular time for proceeds of disposition equal to its fair market value immediately before the particular time, and
• to have acquired the property, at the particular time, at a cost equal to those proceeds,

New subsection 142.6(1.4) applies to taxation years that begin after February 24, 1994.

Change in status — prescribed securities exchange investment

ITA
142.6(1.5)

New subsection 142.6(1.5) of the Act applies where a property ceases, at a particular time in a taxation year, to be a prescribed securities exchange investment of a taxpayer and, as a result, becomes mark-to-market property of the taxpayer for the taxation year.

In these circumstances, subsection 142.6(1.5) deems the taxpayer

• to have disposed of the property (this being a disposition to which subsection 142.5(1) of the Act does not apply) immediately before the particular time for proceeds of disposition equal to its fair market value immediately before the particular time, and
• to have acquired the property, at the particular time, at a cost equal to those proceeds,

New subsection 142.6(1.5) applies for taxation years that begin after 1998.

Change in status — significant interest

ITA
142.6(1.6)

New subsection 142.6(1.6) of the Act applies if, at the end of a particular taxation year, a taxpayer holds shares of the capital stock of a corporation, because of that holding the taxpayer has a significant interest in that corporation at any time in that taxation year, and the taxpayer did not, at any time in the following taxation year, have a significant interest in that corporation.

In these circumstances, subsection 142.6(1.6) deems the taxpayer to have

• disposed of those shares immediately before the end of the particular taxation year for proceeds equal to the shares’ fair market value, and
• acquired those shares at the end of the particular taxation year at a cost equal to those proceeds.

New subsection 142.6(1.6) applies for taxation years that begin on or after October 1, 2006.

Deemed disposition not applicable

ITA
142.6(2)

Subsection 142.6(2) of the Act provides that, for the purposes of the Act, a deemed disposition and reacquisition of a share under certain rules relating to securities held by financial institutions does not affect the time at which a taxpayer is considered to have acquired the share.

Subsection 142.6(2) is amended to add a reference to new subsections 142.6(1.4), (1.5) and (1.6) the amendment applies to taxation years that begin on or after October 1, 2006.

Clause 30

Tax-free Savings Accounts

ITA
146.2

Section 146.2 of the Act provides rules relating to tax-free savings accounts (TFSAs). Several amendments are being made to section 146.2 to respond to issues identified after the introduction of S.C. 2008, c. 28 (the Budget Implementation Act, 2008), which contained the original legislation to implement TFSAs. These amendments are discussed in the commentary below.

Consequential to these amendments, subsections 146.2(3) to (6) are renumbered as subsections 146.2(5) to (8) and subsections 146.2(7) to (9) are renumbered as subsections 146.2(10) to (12). References in these notes are to the subsections as renumbered. For ease of reference, the effects of the renumbering are outlined in the following Table of Concordance.

 Former 146.2 Subsection New 146.2 Subsection (1) Definitions (1) Definitions (2) Qualifying arrangement conditions (2) Qualifying arrangement conditions (3) Paragraphs (2)(a), (b) and (e) not applicable (4) Using TFSA interest as security for a loan (3) TFSA (5) TFSA (4) Trust not taxable (6) Trust not taxable (5) Amount credited to a deposit (7) Amount credited to a deposit (6) Trust ceasing to be a TFSA (8) Trust ceasing to be a TFSA (9) Trust ceasing to be a TFSA on death of holder (7) Annuity contract ceasing to be a TFSA (10) Annuity contract ceasing to be a TFSA (8) Deposit ceasing to be a TFSA (11) Deposit ceasing to be a TFSA (9) Arrangement is TFSA only (12) Arrangement is TFSA only (13) Regulations

The amendments to section 146.2 apply to the 2009 and subsequent taxation years.

Definitions

ITA
146.2(1)

"qualifying arrangement"

The definition "qualifying arrangement" in subsection 146.2(1) of the Act is relevant primarily for subsection 146.2(5) of the Act. Under that subsection, an arrangement can become a tax-free savings account (TFSA) only if it is a qualifying arrangement at the time it is entered into, and ceases to be a TFSA if it subsequently ceases to be a qualifying arrangement.

An annuity contract with a licensed annuities provider is one of the three types of qualifying arrangements. To qualify, subparagraph (b)(ii) of the definition requires that the annuity contract not be adjoined to another contract or arrangement. This condition was intended to preclude contracts commonly referred to as "split dollar" arrangements due to potential concerns about shared-ownership and cross-subsidization between arrangements. However, this condition may have overly broad effects in some instances.

Given that the policy concerns that the condition was intended to address are generally addressed by other provisions in section 146.2 and Part XI.01 of the Act, subparagraph (b)(ii) is amended to eliminate this condition.

Using TFSA interest as security for a loan

ITA
146.2(3) and (4)

New subsections 146.2(3) and (4) of the Act are introduced to clarify that none of the rules in paragraphs 146.2(2)(a), (b) and (e) of the Act apply to prevent the holder of a tax-free savings account (TFSA) from using his or her interest in the TFSA as security for a loan or other indebtedness. To guard against the "sale" or "rental" of TFSA contribution room, the relief conferred by these subsections will apply only if the debt agreement is on arm’s length terms and it is reasonable to conclude that none of its main purposes is to enable another person or partnership to benefit from the exemption from tax provided in respect of the TFSA.

TFSA

ITA
146.2(5)

Subsection 146.2(5) of the Act describes the circumstances under which an arrangement becomes, and ceases to be, a tax-free savings account (TFSA). One of the conditions that must be met for an arrangement to be considered to be a TFSA is that, on or before the 60th day after the year in which the arrangement was entered into, the issuer file with the Minister an election (in prescribed form and manner) to register the arrangement as a TFSA.

Subsection 146.2(5) is amended in two respects. First, the filing deadline for the election is changed to the last day of February of the year following the year in which the arrangement is entered into. This corresponds to the filing deadline for the TFSA annual information return required under new subsection 223(1) of the Income Tax Regulations. It is expected that the filing of the first information return for a TFSA will constitute a valid election, provided that the return is filed on time. Second, subsection 146.2(5) is amended to clarify the precise timing as to when an arrangement ceases to be a TFSA.

Trust ceasing to be a TFSA on death of holder

ITA
146.2(9)

Subsection 146.2(5) of the Act provides that an arrangement ceases to be a tax-free savings account (TFSA), and thus loses its tax-exempt status, on the death of the last holder of the TFSA. In the case of a trusteed arrangement, subsection 146.2(8) of the Act treats the trust as having disposed of and reacquired all of its property for the property’s fair market value (FMV). This ensures that the trust is taxed only on income accruing after the holder’s death, and that capital gains and losses arising from any subsequent dispositions of property reflect only increases or decreases in value occurring after the holder’s death.

New subsection 146.2(9) is introduced to prevent this treatment of trusteed TFSAs from causing undue administrative and reporting difficulties. The new subsection provides several rules that modify the tax treatment of trusteed TFSAs on the death of the holder, and bring the tax treatment of trusteed TFSAs into closer alignment with the tax treatment of trusteed RRSPs on the death of the annuitant.

New paragraph 146.2(9)(a) deems the trusteed arrangement to continue to be a TFSA for specified provisions of the Act and Regulations. (For all other purposes, it is no longer a TFSA.) The main effect of this deeming rule is to allow the trust to continue to maintain its tax-exempt status under subsection 146.2(6) of the Act until the end of the year following the year in which the holder dies. If it is still in existence at the beginning of the second year following the holder’s death, the trust will become taxable from that point forward and, by virtue of subsection 146.2(8) of the Act, will be treated as having disposed of, and reacquired, its property for its FMV at that time.

New paragraph 146.2(9)(b) requires that any payments made from the trust during the exempt period in full or partial satisfaction of a taxpayer’s beneficial interest in the trust be included in the taxpayer’s income for the year of receipt, except to the extent designated by the trust as being attributable to the FMV of the TFSA at death. In other words, to the extent that the payment represents the distribution of income earned on, or appreciation in the value of, the trust’s property during the exempt period, that amount will be included in the taxpayer’s income. As with RRSPs, there are no specific rules in the Act for the trust to follow in determining the extent to which any given payment made following the death of the TFSA holder is attributable to post-death income or appreciation in value. The only constraint imposed on the trust is that the total amounts designated as being non-taxable cannot exceed the FMV of the trust’s assets at death.

New paragraph 12(1)(z.5) of the Act requires that the income inclusion determined under paragraph 146.2(9)(b) be included in the determining the taxpayer’s income from property. With the exception of payments to non-residents, there is no requirement for the issuer to withhold tax on the payments.

New paragraph 146.2(9)(c) is relevant only if the trust continues to exist after the end of the exempt period. It provides that the trust is required to include in its income for its first taxable year any post-death exempt period income or appreciation that was not paid out during the exempt period. Paragraph 12(1)(z.5) requires this amount to be included in the trust’s income as income from property, which may be flowed out to the beneficiaries of the trust under regular trust taxation rules.

Regulations

ITA
146.2(13)

New subsection 146.2(13) of the Act allows the Governor in Council to make regulations requiring issuers to file information returns relating to tax-free savings accounts (TFSAs). In this regard, new subsection 223(1) of the Regulations requires TFSA issuers to file annual information returns. For further details, refer to the commentary on that subsection below.

Clause 31

Definitions

ITA
149.1(1)

Section 149.1 of the Act provides the rules that must be met for charities to obtain and keep registered charity status. Budget 2007 introduced an excess corporate holdings regime for private foundations that requires a private foundation to divest itself of excessive shareholdings in corporations.

The definitions in subsection 149.1(1) of the Act apply for the purposes of sections 149.1 and 149.2 and Part V of the Act. Certain definitions in subsection 149.1(1) are amended or replaced concurrently with amendments to section 149.2, generally to provide an exception in respect of certain shares, not listed on a designated stock exchange, acquired by a private foundation before March 19, 2007.

These amendments to subsection 149.1(1) apply after March 18, 2007.

"divestment obligation percentage"

The "divestment obligation percentage" of a private foundation for a taxation year generally represents the percentage of outstanding shares of a class of the capital stock of a corporation that must be divested by the private foundation before the end of the year in order to avoid the application of a penalty under subsection 188.1(3.1) of the Act. The definition is amended to provide that the percentage otherwise determined cannot be greater than the amount by which the percentage of shares of a class that are held by the foundation exceeds the "exempt shares percentage" of the foundation. As such, a foundation is not required in a taxation year to divest of corporate shares if, at the end of the year, the foundation holds no shares other than exempt shares.

For more information, readers may refer to the commentary for the definitions "exempt shares" and "exempt shares percentage".

"entrusted shares percentage"

Where a private foundation has an entrusted shares percentage greater than 20 per cent, the excess corporate holdings percentage is calculated by using the entrusted shares percentage instead of the 20 per cent threshold. Entrusted shares are shares of a class of the capital stock of a corporation, held by a foundation at a particular time, that were acquired (generally before March 19, 2007) by way of a gift that is subject to a trust or direction that the foundation may not dispose of them before that time.

The definition "entrusted shares percentage" is repealed and replaced with paragraph (a) of the new definition "exempt shares", which applies for the purpose of the new definition of the "exempt shares percentage" of a private foundation. For more information, readers may refer to the commentary for those definitions.

"equity percentage"

The new definition "equity percentage" applies for the purpose of the new definition of "exempt shares". Generally, the excess corporate holdings regime does not require a private foundation to divest of exempt shares that it held on March 19, 2007. Such exempt shares may include corporate shares that are not listed on a designated stock exchange: however, an exception is unlisted shares of a corporation that holds an equity percentage in a public corporation.

In this regard, "equity percentage" has, subject to subsection 149.2(2.1), the same meaning as defined in subsection 95(4) of the Act. However, for the purpose of identifying exempt shares under the excess corporate holdings regime, it is not necessary to calculate the amount of the percentage: rather, it is only necessary to determine that the percentage would be greater than zero.

It is thus sufficient to know that a particular corporation (some unlisted shares of which are held by the private foundation) holds either directly or indirectly through its shareholdings in another corporation an interest in the shares of a public corporation. If this is the case, then the particular corporation will have an equity percentage in the public corporation.

For this purpose, new subsection 149.2(2.1) of the Act generally treats a right to acquire shares, or to control voting rights in respect of shares, as an interest in the shares.

For more information, readers may refer to the commentary for subsection 149.2(2) and to the example under the commentary for the definition "exempt shares".

"exempt shares"

The new definition "exempt shares" applies for the purpose of the new definition of "exempt shares percentage" of a private foundation. In general, under the excess corporate holdings regime, no obligation is imposed on a private foundation to divest of shares, previously described as "entrusted shares", that were

• donated to the foundation before March 19, 2007 and that are subject to a condition that they be retained by the foundation; or
• donated on or after March 19, 2007 and before March 19, 2012, pursuant to the terms of a will signed, or an inter vivos trust settled, before March 19, 2007 that included such a condition and that was not amended after that date.

The new definition of exempt shares also includes shares acquired by a private foundation in exchange for other shares that were exempt shares. For more information, readers may refer to the commentary for the definition of "substituted shares".

Further, exempt shares include certain shares held by a private foundation as of March 18, 2007 that are not listed on a designated stock exchange ("unlisted shares"). This exemption does not, however, extend to unlisted shares in a particular corporation through which the foundation has, directly or indirectly, an interest in shares of a public corporation. More specifically, unlisted shares in a particular corporation held by the foundation will not be exempt if

1. the particular corporation has an "equity percentage" in the shares of a public corporation (discussed further below); and

2. the particular corporation, or a third corporation through which the particular corporation indirectly holds its equity percentage in the public corporation, is controlled by relevant persons in respect of the foundation or by the foundation alone or together with relevant persons;

unless

3. the foundation, even if it held directly the shares of the public corporation that give rise to the equity interest, would not have an excess corporation holdings percentage in respect of the class of those public corporation shares; or

4. the foundation, alone or together with any controlled corporation referred to in no.2 above, holds no more than 2% of all the issued and outstanding shares of that class of the public corporation.

Unlisted shares that are not exempt shares, and all listed shares, held on March 18, 2007 are subject to the transitional excess corporate holdings rules in subsection 149.2(8) of the Act.

An "equity percentage" of a particular corporation in the shares of a public corporation is, in general, an interest held directly or indirectly through its shareholdings in another corporation. For further detail, readers may refer to the commentary on the definitions "equity percentage". A "relevant person" in respect of a private foundation is defined in subsection 149.1(1) of the Act, and is generally a person that does not deal at arm’s length with the private foundation.

 Example 1 – direct interest of corporation Mr. X is the sole trustee of the X Family Foundation. On March 18, 2007, the X Family Foundation held 48% of the voting shares of X Corporation, a private corporation of which Mr. X owned the other 52% of the voting shares. On November 1, 2008, X Corporation acquired 16% of the Class A shares of PubCo, a public corporation, and the X Family Foundation purchased 5% of the same class of shares. None of these shareholdings had changed as of December 31, 2008. The X Family Foundation must determine whether, on December 31, 2008, its unlisted shares in X Corporation are exempt from the excess corporate holdings regime or, in the alternative, are subject to the transitional rules that apply to corporate shares held by a private foundation on March 18, 2007. 40 X Corporation has an equity percentage in PubCo, because it holds shares in PubCo. It is not necessary to calculate the amount of the equity percentage.41 The X Family Foundation does not control X Corporation (the owner of the PubCo shares), but X Corporation is controlled by Mr. X, who is a relevant person in respect of the X Family Foundation because he controls the foundation.42 The X Family Foundation, if it held the PubCo Class A shares itself, would hold 21% of that class of shares, and therefore would have an "excess holdings percentage" in respect of those shares of 1% (calculated without reference to the transitional rules).The X Family Foundation, together with X Corporation (the "controlled corporation"), holds more than 2% of the PubCo Class A shares. Even though the X Family Foundation’s shares of X Corporation were acquired before March 19, 2007, they are not "exempt shares" as of December 31, 2008 because on that date X Corporation (being a corporation controlled by a relevant person, Mr. X) has an interest in a public corporation.

 Example 2 – indirect interest of corporation As with Example 1, Mr. X is the sole trustee of the X Family Foundation. On March 18, 2007, the X Family Foundation held 48% of the voting shares of Y Corporation, a private corporation of which Mr. X owned the other 52% of the voting shares. On July 1, 2008, Y Corporation purchased 25% of the voting shares of AA Corporation, a private corporation of which Mrs. X (spouse of Mr. X) held the other 75%. On November 1, 2008, AA Corporation acquired 16% of the Class A shares of PubCo, a public corporation, and the X Family Foundation purchased 5% of the same class of shares. None of these shareholdings had changed as of December 31, 2008. The X Family Foundation must determine whether, on December 31, 2008, its unlisted shares in Y Corporation are exempt from the excess corporate holdings regime or, in the alternative, are subject to the transitional rules that apply to corporate shares held by a private foundation on March 18, 2007. 43 Y Corporation has an equity percentage in PubCo, because it holds shares of AA Corporation, which in turn holds shares in PubCo. It is not necessary to calculate the amount of the equity percentage.44 The X Family Foundation does not control A Corporation (the owner of the PubCo shares). But AA Corporation is controlled by Mrs. X, who is a relevant person in respect of the X Family Foundation because she is related to Mr. X, who controls the foundation.45 The X Family Foundation, if it held the PubCo Class A shares itself, would hold 21% of that class of shares, and therefore have an "excess holdings percentage" in respect of those shares of 1% (calculated without reference to the transitional rules).The X Family Foundation, together with AA Corporation (the "controlled corporation"), holds more than 2% of the PubCo Class A shares. Even though the X Family Foundation shares of Y Corporation were acquired before March 19, 2007, they are not "exempt shares" as of December 31, 2008 because on that date Y Corporation has an indirect interest in a public corporation, via its interest in AA Corporation (being a corporation controlled by a relevant person).

 Example 3– no excess holdings percentage Assume that, in Example 2, AA Corporation had acquired only a 12% interest in Pubco. The Y Corporation shares held by the foundation would remain exempt shares, because the combined shareholdings in PubCo of the foundation, relevant persons and AA Corporation would be only 17%. That is, the foundation would not, even if it owned all those shares directly, have an excess (over 20%) holdings percentage.

"exempt shares percentage"

The new definition "exempt shares percentage" of a private foundation applies for the purpose of calculating the "divestment obligation percentage" of a private foundation, as defined in subsection 149.1(1) of the Act. The exempt shares percentage of a private foundation is the percentage of issued and outstanding shares of a corporation that are exempt shares held by the foundation. A private foundation may cease to have an exempt shares percentage if shares that it holds cease to be exempt shares. Similarly, a private foundation may commence to have an exempt shares percentage if unlisted shares that it held on March 18, 2007 have ceased to be exempt shares as defined in subsection 149.1(1).

If a private foundation holds identical shares of a class of capital stock of a corporation, some of which were held on March 18, 2007, and others of which were acquired after that day, the disposition of some shares is considered not to reduce the exempt shares percentage except to the extent that the number disposed of exceeds the number of shares acquired after March 18, 2007. However, where exempt shares are disposed of, a later acquisition of identical shares will not restore the foundation’s exempt shares percentage.

For more information, readers may refer to the commentary for the definitions "divestment obligation percentage" and "exempt shares".

"substituted shares"

The new definition "substituted shares" applies for the purpose of the definition of "exempt shares". In general, certain shares acquired by a private foundation in exchange for exempt shares will themselves be exempt. The new shares must be acquired in the course of a transaction to which section 51, subsection 85.1(1), or section 86 or 87 of the Act applies.

Clause 32

ITA
149.2

Section 149.2 of the Act includes some of the rules relevant to the excess corporate holdings regime in respect of private foundations, such as for the calculation of the divestment obligation percentages of a private foundation in respect of its excess holdings of the shares of the capital stock of a corporation.

Ownership

ITA
149.2(2.1)

New subsection 149.2(2.1) of the Act applies for the purposes of the definition "equity percentage" in subsection 149.1(1) of the Act, applicable after March 18, 2007. That definition applies for the purpose of determining whether certain shares, held by a private foundation on March 18, 2007, are exempt from divestment under the excess corporate holdings regime.

In general, a particular corporation has an equity percentage in another corporation if the particular corporation has an interest in the shares of the other corporation (held either directly or indirectly through the particular corporation’s shareholdings in a third, intermediary corporation). For example, if the particular corporation owns shares in a second corporation, which in turn owns shares in a public corporation, then the particular corporation has an equity interest in the public corporation.

Subsection 149.2(2.1) extends this definition such that a "right under a contract" described in paragraph 251(5)(b) of the Act will be considered to represent ownership of shares. Such a right under a contract could include, for instance, a right to acquire shares or to control the voting rights of shares, a right to cause a corporation to redeem, acquire or cancel the shares of another shareholder, or a right to cause a reduction to the voting rights of another shareholder.

As such, in the example described above, if the second corporation held a right to control the voting rights of shares in the public corporation, rather than the shares themselves, the particular corporation would still have an equity interest in the public corporation.

Shares held through a trust on March 18, 2007

ITA
149.2(9) to (11)

New subsections 149.2(9) to (11) of the Act apply for the purpose of the excess corporate holdings regime for private foundations. These provisions attribute to a foundation, in certain circumstances, shares held by a trust on March 18, 2007.

New subsection 149.2(10) deems a foundation to own shares held by a trust on March 18, 2007, in proportion to the value of the foundation’s proportionate interest in the trust, where the following conditions in subsection 149.2(9) are met:

• the foundation is the sole trustee of the trust; or
• the foundation is a "majority interest beneficiary" (as that term is defined in subsection 251.1(3) of the Act) of the trust, and a majority of the trustees of the trust consist of the foundation and relevant persons in respect of the foundation.

Where the foundation is deemed to hold shares that meet the conditions of the definition "exempt shares" in subsection 149.1(1) of the Act, the foundation may not, as a consequence, have a divestment obligation in respect of those shares.

For the purpose of simplifying the valuation of a foundation’s interest in a discretionary trust, subsection 149.2(11) removes the significance of a person exercising, or failing to exercise, a discretionary power in respect of the allocation of income or capital of the trust.

These amendments apply for taxation years of private foundations that begin on or after February 26, 2008.

Allocation of net increase in excess corporation holdings percentage

ITA
149.2(5)(b) and (c)

Subsection 149.2(5) of the Act allocates the increase, in a taxation year, in a private foundation’s "excess corporation holdings percentage" in respect of corporate shares. The increase is allocated to the divestment obligation percentage for a taxation year in accordance with the manner in which the foundation acquired shares of that class.

The divestment obligation percentage is effectively a "pool" of excess acquisitions of the current year or prior years.

Subsection 149.2(5) is amended to provide a relieving technical amendment that applies to registered charities that were private foundations on March 19, 2007. In applying paragraphs 149.2(5)(b) and (c) of the Act to the first taxation year of the foundation that begins after that date, the phrase "in the current year" in those paragraphs is to be read as the phrase "in the period that begins on March 18, 2007 and ends at the end of the current year".

This amendment ensures that longer divestment periods for bequests and arm’s length gifts of shares are retained for shares acquired by the foundation in the "stub period" from March 18, 2007 to the end of the taxation year of the foundation that includes that date.

Clause 33

Assessment

ITA
152

Section 152 of the Income Tax Act contains rules relating to assessments (including reassessments) of tax, interest and penalties payable by a taxpayer.

Assessment and Reassessment – Limitation Period

ITA
152(4)

Subsection 152(4) of the Act generally provides that the Minister of National Revenue may not reassess tax payable by a taxpayer for a taxation year after the normal reassessment period for the taxpayer in respect of the year unless certain conditions described in paragraph 152(4)(a) or (b) have been met.

Subsection 152(4) is amended by adding new paragraph (c), consequential on the Canada-Ontario Memorandum of Agreement Concerning a Single Administration of Ontario Corporate Tax. New paragraph (c) provides for an extension of the normal reassessment period to one year after the later of two dates. These two dates are the day on which the Minister is advised of a provincial reassessment and the day that is 90 days after the mailing of a provincial reassessment notice.

"Provincial reassessment" is used in new paragraph 152(4)(c) to refer to a specific type of assessment or reassessment. Generally, a provincial reassessment is an assessment, reassessment or additional assessment of tax payable by a corporation for a taxation year under the law of a province that imposes a corporate income tax, where that assessment or reassessment is made because of a change in the allocation of the corporation’s taxable income earned in a province.

This amendment applies on Royal Assent.

Extended reassessment period

ITA
152(6.2)

New subsection 152(6.2) of the Act is added as a consequence of the new definition "excluded property" in subsection 142.2(1) of the Act. Subsection 152(6.2) requires that the Minister of National Revenue reassess a taxpayer’s tax for a particular taxation year, in order to take into account the application of paragraph (d) of the definition "excluded property" in subsection 142.2(1) in respect of shares held by the taxpayer in the particular taxation year, if

• the taxpayer has filed for the particular taxation year the return of income required by section 150, and
• the taxpayer has filed with the Minister, on or before the filing-due date of the taxpayer’s taxation year that includes the acquisition of control time referred to in paragraph (d) of the definition "excluded property", a prescribed form amending the return.

This change applies for taxation years that begin after 2001. However, for taxation years that begin before October 1, 2006, the reference to "paragraph (d) of the definition of excluded property" is to be read as a reference to "paragraph (d.3) of the definition of mark-to-market property".

Clause 34

Large corporations

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 former large corporation tax. Although that tax no longer applies, various aspects of its calculation are used for other purposes under the Act.

Taxable capital employed in Canada of financial institution

ITA
181.3(1)(c)(ii)(B)

Subsection 181.3(1) of the Act provides the rules for determining the amount of a financial institution's "taxable capital employed in Canada" for the purposes of the former large corporation tax in Part I.3.

In the case of an insurance corporation, a "reserve adjustment" under clause 181.3(1)(c)(ii)(B) is added to taxable capital employed in Canada.

The demutualization of the insurance industry in Canada has resulted in clause 181.3(1)(c)(ii)(B) no longer being necessary. Accordingly it is repealed applicable to taxation years that begin on or after October 1, 2006.

Clause 35

Penalty

ITA
188.1

Section 188.1 of the Act applies penalties to charities. The penalties generally apply in respect of activities that charities are not permitted to undertake.

ITA
188.1(3.2)(c)

188.1(3.3) to (3.5)

Subsection 188.1(3.2) of the Act is an anti-avoidance rule that addresses any attempt by a private foundation to circumvent the reporting and divestment obligation requirements of the excess corporate holdings regime.

New subsections 188.1(3.3) to (3.5) of the Act add an anti-avoidance provision in respect of the indirect holding by a private foundation or relevant person, through an interest in a trust, of shares or certain other interests in a corporation. Subsection 188.1(3.5) deems a foundation (or, in some circumstances, a relevant person in respect of the foundation) to own shares that are actually held by a trust, in proportion to the value of the foundation’s proportionate interest in the trust, where the following conditions in subsection 188.1(3.3) are met:

• the private foundation or relevant person (each of which is referred to as an "insider") is a beneficiary under the trust;
• it may reasonably be considered that one of the purposes of the establishment of a trust is to hold or acquire shares or other interests or rights in a corporation; and
• the private foundation would have a divestment obligation in respect of the particular class of shares if the private foundation held (in addition to any shares of the class that it actually owns) the shares (or deemed shares – see below) that are owned by the trust.

In this regard, where the trust owns an interest, other than shares, in a corporation, and that interest is associated with a "right under a contract" in respect of shares described in paragraph 251(5)(b) of the Act, the trust is deemed by paragraph 188.1(3.4)(a) to own shares of the same class that correspond to the value of the actual non-share interest in the corporation. Such a right under a contract could include, for instance, a right to acquire shares or to control the voting rights of shares, a right to cause a corporation to redeem, acquire or cancel the shares of another shareholder, or a right to cause a reduction to the voting rights of another shareholder.

For the purpose of the valuation of a foundation’s interest in a discretionary trust, paragraph 188.1(3.4)(b) removes the significance of a person exercising, or failing to exercise, a discretionary power in respect of the allocation of income or capital of the trust.

Paragraph 188.1(3.2)(c) is amended to clarify that the fair market value of a share deemed to be issued by a corporation under this subsection is determined as that of an actual share and without reference to this subsection. This amendment is made concurrently with the inclusion of identical language in new paragraph 188.1(3.5)(c).

These amendments apply to taxation years of private foundations that begin on or after February 26, 2008.

Clause 36

Part VI – Tax on Capital of Financial Institutions

ITA
190.11

Section 190.11 of the Act contains rules for determining the taxable capital employed in Canada by a resident life insurance corporation for the purposes of Part VI of the Act.

ITA
190.11(b)(ii)

In the case of a life insurance corporation that was resident in Canada throughout the year, a "reserve adjustment" under subparagraph 190.11(b)(ii) is added to taxable capital employed in Canada.

The demutualization of the insurance industry in Canada has resulted in subparagraph 190.11(b)(ii) no longer being necessary. Accordingly it is repealed applicable to taxation years that begin on or after October 1, 2006.

Clause 37

Part VI – Tax on Capital of Financial Institutions

Capital

ITA
190.13

Section 190.13 of the Act contains rules for determining the taxable capital employed in Canada by a financial institution for the purposes of Part VI of the Act.

Capital

ITA
190.13(c)(iv)

In the case of a life insurance corporation that was non-resident throughout the year, a "reserve adjustment" under subparagraph 190.13(c)(iv) is added to taxable capital employed in Canada.

The demutualization of the insurance industry in Canada has resulted in subparagraph 190.13(c)(iv) no longer being necessary. Accordingly it is repealed applicable to taxation years that begin on or after October 1, 2006.

Clause 38

SIFT partnerships

ITA
197

Section 197 of the Act applies a tax on certain earnings of a SIFT partnership.

Definitions

ITA
197(1)

"SIFT partnership"

A "SIFT partnership", being a specified flow-through investment partnership, for a taxation year means a Canadian resident partnership if, at any time in the taxation year, the partnership holds non-portfolio property and its securities are listed on a stock exchange or other public market.

The definition is amended to exclude from treatment as a SIFT partnership for a taxation year an entity that is an excluded subsidiary entity for the taxation year. For more information, readers may refer to the commentary on the new definition "excluded subsidiary entity" in subsection 122.1(1) of the Act.

This amendment comes into force on October 31, 2006.

Clause 39

Definitions

ITA
204

Section 204 of the Act sets out a number of definitions that apply for the purposes of Part X of the Act.

"qualified investment"

The definition "qualified investment" in section 204 of the Act sets out the types of property that a trust governed by a deferred profit sharing plan is permitted to hold. The definition is also relevant for RRSPs, RESPs, RRIFs, registered disability savings plans (RDSPs) and tax-free savings accounts (TFSAs), as the definitions "qualified investment" in each of subsections 146(1), 146.1(1), 146.3(1), 205(1) and 207.01(1) largely adopt the list of investments described by the definition in section 204. It is also relevant for investment intermediaries that are registered investments (RIs) under any of paragraphs 204.4(2)(b), (d) or (f) of the Act and that, as a result, are required to limit their investments to qualified investments.

Paragraph (c.1) of the definition includes a debt obligation that has, at the time of acquisition, an investment grade rating with a prescribed credit rating agency and that is part of a minimum $25 million issuance. In the case of debt obligations that are issued on a continuous basis, the$25 million issuance requirement can be satisfied by having regard to all of the issuer's outstanding debt obligations of that type.

Paragraph (c.1) is amended in three respects. First, it is amended so that the investment grade rating condition may be satisfied either at the time of acquisition or on an on-going basis. This amendment is intended, in particular, to provide a means for an issuer of a previously non-rated debt obligation that had been a qualified investment under another provision of the Act or Regulations, but that later ceases to qualify under that provision, to retain qualified investment status by obtaining an investment grade rating for the debt obligation.

Second, paragraph (c.1) is amended to waive the investment grade rating condition in the case of debt obligations that are acquired pursuant to a court-approved proposal under Canadian insolvency legislation in exchange for debt obligations that previously had an investment grade rating. This amendment is intended, in particular, to ensure that any RIs or registered plan trusts that held third-party asset-backed commercial paper are not adversely impacted under the income tax rules by the restructuring plan developed by the Pan-Canadian Investors Committee.

 Example 2 A SIFT partnership has permanent establishments in Quebec and outside of Canada in the year. The SIFT partnership’s taxable SIFT distributions earned in Quebec for the year are $30,000. The remaining$70,000 of taxable SIFT distributions are not attributable to any province in which the partnership has a permanent establishment in the year. In determining variable A, Quebec’s general corporate income tax rate for the year is 0%. Therefore, A will be $30,000 /$100,000 x 0 = 0. Variable B is determined by the formula (1- F/D) x 0.1, which is (1-$30,000 /$100,000) x 0.1 = 0.07. The provincial SIFT tax rate, expressed as a decimal fraction, is the sum of A and B, which provides the SIFT partnership with a rate of 0.07. Therefore, the SIFT Partnership will pay $7,000 in federal tax as its provincial component of the SIFT tax. None of this tax will be distributed to the provinces. Clause 58 Part XIV of the Regulations provides rules in respect of insurance business policy reserves. Policy reserves for pre-1996 policies ITR 1401 Section 1401 establishes the amount that a life insurer is permitted to deduct as a policy reserve under subparagraph 138(3)(a)(i) in respect of its pre-1996 life insurance policies. The preamble of section 1401 is amended by deleting the references to subsection 138(3)(a)(i) of the Act. For the purposes of calculating a life insurer’s pre-1996 life insurance policy reserves, policies that were previously considered to be "pre-1996 life insurance policies" will now be subject to the same policy reserve rules as "post-1995 life insurance policies" (as described in section 1404 of the Regulations). Accordingly, paragraphs 1401(1)(d.1), (d.2), (e), and subsections 1401(1.1), (3), and (4) of the Regulations are no longer needed and are being repealed. The remaining portions of subsection 1401(1) will apply for the purposes of calculating the Part XII.3 tax on investment income accruing to fund insurance liabilities of a life insurance corporation and the calculation of a policy’s accumulating fund in section 307 of the Regulations. Therefore, the preamble to subsection 1401(1) of the Regulations, and paragraphs 1401(1)(a) to (d), will continue to apply and have been modified to give effect to this restricted application. The amendments to section 1401 apply to taxation years that begin on or after October 1, 2006. Clause 59 Policy reserves ITR 1404 Section 1404 of the Regulations establishes the basis for determining the amount an insurer may deduct under subparagraph 138(3)(a)(i) of the Act as a policy reserve in respect of its life insurance policies that are post-1995 life insurance policies. Section 1404 is amended to remove the reference to "post-1995 life insurance policies", consequential to amendments to section 1401 of the Regulations. Section 1404 will apply in respect of all life insurance policies of an insurer as a consequence of the amendments. For further details, readers may refer to the commentary to proposed amendments to section 1401. This change applies for taxation years that begin on or after October 1, 2006. Clause 60 Definitions ITR 1408 Section 1408 of the Regulations provides a number of definitions and interpretative rules that apply for purposes of the rules in Part XIV of the Regulations dealing with the determination of an insurer’s policy reserves. The definitions "life insurance policy in Canada" and "life insurance policy" in subsection 1408(1) of the Regulations are amended to state that each of these terms has, for the purposes of Part XIV of the Regulations, the same meaning as for the purposes of section 138 of the Act. This amendment applies to taxation years that begin after November 7, 2007. Clause 61 Part XXIV of the Regulations sets out special rules for the computation of an insurer’s income. Definitions ITR 2400(1) Subsection 2400(1) of the Regulations provides definitions for the purposes of Part XXIV of the Regulations, which applies, among other things, in determining which properties of a life insurer are properties used or held by the insurer in the course of carrying on an insurance business. A number of new definitions are added for the purposes of new subsection 2400(8) of the Regulations, and are consequential on the introduction of that new subsection. "base year" The "base year" of an insurer is the insurer’s taxation year that immediately precedes its transition year. "transition year" The "transition year" of an insurer is the insurer’s first taxation year that begins after September 30, 2006. Each of these definitions applies to taxation years that begin on or after October 1, 2006. Transition year ITR 2400(8) Certain of the accounting rules that insurance corporations must follow are being changed effective for fiscal years beginning on or after October 1, 2006. These changes impact the tax rules that apply to insurance corporations for taxation years commencing on or after October 1, 2006. In order to ensure that no inconsistencies arise under Part XXIV of the Regulations in respect of the tax treatment of insurance corporations as a result of these changes, new subsection 2400(8) of the Regulations provides that, a computation that is required to be made under Part XXIV in respect of an insurer’s base year and that is relevant to a computation (the "transition year computation") that is required to be made under Part XXIV in respect of the insurer’s transition year shall, for the purposes only of the transition year computation, be made using the same definitions, rules and methodologies that are used in the transition year computation. These would include accounting rules required to be complied with by the insurer in its transition year. New subsection 2400(8) applies to taxation years that begin on or after October 1, 2006. Clause 62 and 63 Deferred income plans – Qualified investments Part XLIX Part XLIX of the Regulations lists a number of types of property that are prescribed to be qualified investments for trusts governed by RRSPs and other registered plans. Qualified investments ITR 4900 and 4901 Section 4900 of the Regulations lists a number of types of property that are prescribed to be qualified investments for trusts governed by registered retirement savings plans (RRSPs) and other registered plans. Section 4901 contains several interpretive provisions for the purposes of these rules. Sections 4900 and 4901 are amended, effective for the 2009 and subsequent taxation years, to apply for the purposes of the definition "qualified investment" in subsection 207.01(1) of the Act that applies for trusts governed by tax-free savings accounts (TFSAs). With the exception of property described in subsection 4900(6) of the Regulations, the amendments provide that the types of property that are prescribed to be qualified investments for a TFSA trust correspond to those that are prescribed for an RRSP trust. (For details on new subsection 4900(14) of the Regulations, readers may refer to the commentary on new section 5000 of the Regulations.) Section 4900 is also amended to introduce new paragraph 4900(1)(p.1) to provide that an American Depositary Receipt (ADR) is a qualified investment for a registered plan trust, provided that the underlying security that the ADR represents is listed on a designated stock exchange. This amendment is intended to ensure, in particular, that the de-listing of an ADR will not, in and of itself, result in the ADR becoming a non-qualified investment. (An ADR that is itself listed on a designated stock exchange is also covered by the general rule for listed securities in paragraph (d) of the definition "qualified investment" in section 204 of the Act.) This amendment applies in determining qualified investment status at any time after 2005. Finally, several housekeeping amendments are being made to subsection 4900(1), effective for property acquired after Royal Assent. • Paragraphs 4900(1)(i.3) (asset-backed securities), (l) (debt issued by the World Bank and other supra-national institutions) and (o) (investment-grade debt issued by foreign governments) are repealed. The types of property described by these paragraphs are covered by the general rule for investment grade debt in paragraph (c.1) of the definition "qualified investment" in section 204 of the Act. • Paragraphs 4900(1)(k) (pre-1981 qualified investments) and (s) (pre-2002 over-the-counter securities) are repealed. These transitional provisions have no application to property acquired after Royal Assent. • Paragraphs 4900(1)(j.2) (mortgage-backed certificates) is amended to replace the reference to a bond rating agency that rates debt in the ordinary course of its business with a reference to a credit rating agency referred to in subsection 4900(2). Clause 64 Tax-free savings accounts – Prohibited investments Part L ITR 5000 Section 207.04 of the Act imposes special taxes on the holder of a tax-free savings account (TFSA) if a trust governed by the TFSA holds a non-qualified investment or a prohibited investment (as defined in subsection 207.01(1) of the Act). The qualified investment regime sets out the basic investment framework for TFSA trusts; whereas the prohibited investment regime represents an overriding investment restriction for TFSA trusts that is intended to guard against tax planning opportunities with respect to closely-held investments. Responsibility for compliance with the qualified investment rules generally lies with TFSA issuers; whereas responsibility for compliance with the prohibited investment rules lies with TFSA holders. This distinction recognizes the practical difficulties that TFSA issuers would have in obtaining the necessary information to ensure compliance with the prohibited investment rules on an on-going basis. The definition "prohibited investment" specifically excludes a "prescribed excluded property" and specifically includes a "prescribed property". New section 5000 of the Regulations sets out the property that is prescribed for these two purposes. Prescribed excluded property New subsection 5000(1) provides that property described in paragraph 4900(1)(j.1) of the Regulations – a debt obligation that is secured by a mortgage or hypothecary claim in respect of real or immovable property situated in Canada, insured either under the National Housing Act or by an approved private insurer – is prescribed excluded property. This will allow individuals (once they have accumulated sufficient TFSA funds) to hold their own mortgage loan as an investment in their TFSA. Prescribed property New subsection 5000(2) is relevant where a TFSA trust holds shares of a specified small business corporation or a specified cooperative corporation (as defined in subsection 4901(2) of the Regulations) or a venture capital corporation described in any of sections 6700, 6700.1 or 6700.2 of the Regulations and those shares are a qualified investment for the trust solely because of new subsection 4900(14) of the Regulations. Subsection 4900(14) generally provides that a share of such a corporation is a qualified investment for a TFSA trust if the share is not a prohibited investment for the trust. As is the case with subsection 4900(12) (which is a comparable provision that applies for registered retirement savings plans, registered retirement income funds and registered education savings plans), the qualification conditions in subsection 4900(14) apply only at the time of acquisition. Consequently, shares that are a qualified investment under that subsection retain their qualified investment status for as long as they are held by the TFSA trust. New subsection 5000(2) provides that, if a share of a corporation that is a qualified investment for a TSFA trust solely because of subsection 4900(14) ceases to be described in paragraph 4900(14)(a), it is a prescribed property for the TFSA trust. In other words, if a corporation whose shares are held by a TFSA trust subsequently ceases to satisfy the relevant conditions to be a specified small business corporation, specified cooperative corporation or Regulation 6700, 6700.1 or 6700.2 venture capital corporation (as the case may be), the shares become a prohibited investment for the TFSA trust. Consequently, the holder of the TFSA will be liable for tax under section 207.04 of the Act. Clause 65 and 66 Medical expense tax credit Part LVII Part LVII of the Regulations provides rules related to the medical expense tax credit. The heading "Medical Devices and Equipment" for Part LVII is replaced by "Medical Expense Tax Credit" to reflect the introduction of new section 5701, which identifies prescribed drugs, medicaments, preparations or substances. Prescribed drugs, medicaments etc. ITR 5701 New section 5701 of the Regulations describes the type of drugs, medicaments, preparations or substances that are prescribed for the purpose of subparagraph 118.2(2)(n)(ii) of the Act. S.C. 2008, c. 28 (the Budget Implementation Act, 2008) amended paragraph 118.2(2)(n) of the Act to clarify the types of drugs and medications the cost of which is eligible for the medical expense tax credit (METC). Under subparagraph 118.2(2)(n)(ii), eligible drugs and medications include such substances that are prescribed by regulation. New section 5701 stipulates that a substance is prescribed for this purpose if it (a) is manufactured, sold or represented for use in the diagnosis, treatment or prevention of a disease, disorder or abnormal physical state, or its symptoms, or in restoring, correcting or modifying an organic function; (b) is prescribed for a patient by a medical practitioner; and (c) may, in the province in which it is acquired, be lawfully acquired for use by the patient only with the intervention of a medical practitioner. This means that a medication that is available without a prescription, but only with the intervention of a medical practitioner (e.g. a pharmacist) may qualify for the METC but only if it is prescribed for the patient by a medical practitioner. These amendments apply after February 26, 2008. Clause 67 ITR Part LIX Part LIX of the Regulations provides rules for the provisions in the Act relating to foreign affiliates of a taxpayer. ITR 5907 Section 5907 of the Regulations provides definitions and interpretation rules for the purposes of Part LIX. ITR 5907(11) and (11.11) Subsection 5907(11) of the Regulations defines "designated treaty country" for the purposes of Part LIX. The subsection currently defines "designated treaty country" for a taxation year of a foreign affiliate of a corporation to mean a country with which Canada has entered into a comprehensive agreement or convention for the elimination of double taxation on income that has entered into force and has effect for that taxation year of the foreign affiliate. The subsection goes on to provide that any territory, possession, department, dependency or area of that country to which that agreement or convention does not apply is not considered to be part of that sovereign state or jurisdiction. Subsection 5907(11) is amended to address comprehensive tax information exchange agreements as well as comprehensive agreements and conventions for the elimination of double taxation on income. As amended, the subsection defines "designated treaty country" for a taxation year of a foreign affiliate of a corporation to mean a sovereign state or other jurisdiction if Canada has entered into a comprehensive agreement or convention for the elimination of double taxation on income, or a comprehensive tax information exchange agreement, in respect of that sovereign state or jurisdiction, that has entered into force and has effect for that taxation year of the foreign affiliate. The amended subsection similarly extends the second rule described above: any territory, possession, department, dependency or area of that sovereign state or jurisdiction to which that agreement or convention does not apply is not included in that designated treaty country. New subsection 5907(11.11) is added to section 5907. It provides that, for the purpose of applying subsection 5907(11) in respect of a foreign affiliate of a corporation, where a comprehensive tax information exchange agreement enters into force on a particular day, the agreement is deemed to enter into force and to come into effect on the first day of the foreign affiliate’s taxation year that includes the particular day. It is thus analogous to the rule in current subsection 5907(11.1) in connection with comprehensive agreements and conventions for the elimination of double taxation on income. New subsections 5907(11) and (11.11) apply after 2007. Clause 68 Prescribed Amounts and Areas Part LXXIII Part LXXIII of the Regulations sets out prescribed amounts and prescribed areas for a variety of purposes under the Act. Automobile benefits ITR 7305.1 Section 7305.1 of the Regulations prescribes the automobile benefit rates that apply to calculate taxable benefits related to employer-provided automobiles. Proposed changes to these rates are announced each year by news release. On December 24, 2007 the Minister of Finance announced that the prescribed rate used to determine the taxable benefit relating to the personal portion of automobile operating expenses paid by employers for 2008 would increase by 2 cents to 24 cents per kilometre. For taxpayers employed principally in selling or leasing automobiles, it was announced that the prescribed rate would increase by 2 cents to 21 cents per kilometre. Section 7305.1 of the Regulations is amended to give effect to these increases. This amendment applies to taxation years that end after 2007. Clause 69 Automobile deduction limits ITR 7306 Section 7306 of the Regulations prescribes the automobile deduction limits that apply to per-kilometre allowances paid by employers. Proposed changes to these limits are announced each year by news release. On December 24, 2007 the Minister of Finance announced that the limit on the deduction of tax-exempt allowances paid by employers to employees using their personal vehicle for business purposes for 2008 would be increased by 2 cents to 52 cents per kilometre for the first 5,000 kilometres driven and 46 cents for each additional kilometre. It was also announced that for the Yukon Territory, Northwest Territories and Nunavut, the tax-exempt allowance would rise by 2 cents to 56 cents for the first 5,000 kilometres driven and 50 cents for each additional kilometre. Paragraph 7306(a) of the Regulations is amended to give effect to these increases. This amendment applies to taxation years that end after 2007. Clause 70 Financial Institutions — Prescribed Entities Parts XC to XCII of the Regulations contain provisions relating to the tax treatment of securities held by financial institutions. ITR 9001 and 9002 Each of the references in subsections 9001(2), 9002(1), (2) and (3) of the Regulations to the definition "mark-to-market property" in subsection 142.2(1) of the Income Tax Act (the "Act") is being replaced with a reference to the term "excluded property". These changes reflect that the statutory references to property that is specifically excluded from being mark-to-market property are being moved from the definition "mark-to-market property" to the new definition "excluded property" in subsection 142.2(1) of the Act. Clause 71 Prescribed Payment Card Corporation Shares ITR 9002.1 New section 9002.1 of the Regulations prescribes, for the purposes of paragraph (b) of the definition "excluded property" in subsection 142.2(1) of the Act, certain property as prescribed payment card corporation shares. A prescribed payment card corporation share of a taxpayer at any time means a share of the capital stock of a particular corporation if, at that time, the particular corporation is MasterCard International Incorporated, MasterCard Incorporated, or Visa Inc., and the share meets the following conditions: • it is of a class of shares that is not listed on a stock exchange, • it is not convertible into or exchangeable for a share of the class of the capital stock of a corporation that is listed on a stock exchange, and • it was issued by the particular corporation to the taxpayer or to a person related to the taxpayer. This amendment applies to taxation years that begin after February 24, 1994, except that, for taxation years that begin before October 1, 2006, the reference in the section to "paragraph (b) of "excluded property" in subsection 142.2(1) of the Act" is to be read as a reference to "paragraph (d.1) of the definition "mark-to-market property" in subsection 142.2(1) of the Act". Prescribed Securities Exchange Investments ITR 9002.2 New section 9002.2 of the Regulations prescribes, for the purposes of paragraph (c) of the definition "excluded property" in subsection 142.2(1) of the Act, certain property as a prescribed securities exchange investment of a taxpayer. A prescribed securities exchange investment of a taxpayer at any time means a share of the capital stock of a corporation if, at that time, the corporation is a corporation (other than a public corporation) that is The Toronto Stock Exchange Inc., TSX Inc., TSX Group Inc., Bourse de Montréal Inc., or Canadian Venture Exchange Inc. New section 9002.2 applies to taxation years that begin after 1998 and before 2008, except that, for taxation years that begin before October 1, 2006, the reference in the section to "paragraph (c) of the definition" excluded property" in subsection 142.2(1) of the Act" is to be read as a reference to "paragraph (d.2) of the definition "mark-to-market property" in subsection 142.2(1) of the Act". ## Part 2 Amendments in respect of Sales and Excise Taxes ### Excise Act, 2001 Clause 72 Definition "officer" EA, 2001 2 Section 2 of the Excise Act, 2001 (the "Act") defines terms that apply for the purposes of the Act. Except for the purposes of sections 167, 226 and 296, "officer" is currently defined under the Act to mean a person engaged in the administration or enforcement of the Act. It includes a member of the R.C.M.P. and a member of a police force designated under subsection 10(1). In sections 167, 226 and 296, the general meaning of officer applies. The definition "officer" is amended to exclude its application from the new definition "contact information" and consequently have the general meaning of officer applied to it. This change is consistent with other amendments to the Act to facilitate greater use of the Canada Revenue Agency Business Number (BN) by other levels of government (BN Partners) (see clause 73). This amendment comes into force on Royal Assent. Clause 73 Communication of information EA, 2001 211 Section 211 of the Act prohibits officials and other persons from using or communicating confidential information obtained in the course of administering the Act unless they are specifically authorized to do so by one of the exceptions found in that section. Subsections 211(1) to (3), (6), (8) and (9) are amended and new subsections 211(6.1) to (6.3) are added to facilitate greater use of the Canada Revenue Agency Business Number (BN) by other levels of government (BN Partners), with a view to reducing paper work and duplication of effort for business and government alike. Specifically, these amendments provide for: • broadening the BN-related information that may be shared with BN Partners; • expanding the type of government entities that qualify as BN Partners; and • allowing for the publication of the BN by BN Partners in connection with programs and services provided by the BN Partners. Subclauses 73(1) and (2) Definitions EA, 2001 211(1) Subsection 211(1) of the Act provides definitions that apply for the purposes of section 211. The amendments to section 211 change the definition "confidential information" and add new definitions "aboriginal government", "contact information", "corporate information", "government entity", "municipality", "registration information", and "representative". "confidential information" "Confidential information" generally refers to information of any kind and in any form relating to one or more persons that is obtained by or on behalf of the Minister of National Revenue (the "Minister") for the purposes of the Act, by or on behalf of the Minister of Public Safety and Emergency Preparedness for the purposes of section 68, or prepared from such information. The definition "confidential information" is amended to specify that for the purposes of applying subsections (3), (8) and (9) to a representative of a government entity, confidential information includes only the information provided in paragraph 211(6)(j) of the Act (i.e. business number-related information that the representative of a government entity has obtained from an official). "aboriginal government" The new definition "aboriginal government" has the same meaning as under subsection 2(1) of the Federal-Provincial Fiscal Arrangements Act. That Act defines an aboriginal government to mean an Indian government, an Inuit government or a Métis government, or the "council of the band" as defined in subsection 2(1) of the Indian Act. That provision of the Indian Act in turn defines a council of the band as, • in the case of a band to which section 74 of the Indian Act applies, the council established pursuant to that section; and • in the case of a band to which section 74 of the Indian Act does not apply, the council chosen according to the custom of the band, or where there is no council, the chief of the band chosen according to the custom of the band. "contact information" The new definition "contact information" in respect of a holder of a business number defines one subset of information that an official may, under amended paragraph 211(6)(j), share in respect of the holder of the business number. The definition refers to the name, address, telephone number, facsimile number and preferred language of communication of the business number holder and any other specified similar information obtained by the Minister. To accommodate cases where the business number holder is not a natural person, contact information also includes this information in respect of one or more of the holder’s trustees, members or officers, as appropriate. "corporate information" The new definition "corporate information" in respect of a holder of a business number defines a second subset of information that an official may share with a representative of a government entity in respect of a corporation under paragraph 211(6)(j). "Corporate information" means the name (including the number assigned by the incorporating authority), date of incorporation, jurisdiction of incorporation and any information on the dissolution, reorganization, amalgamation, winding-up or revival of the corporation. "government entity" The new definition "government entity" means any of several types of federal, provincial, municipal and aboriginal entities. A "government entity" includes a department or agency of the Government of Canada or of a province, a municipality or an aboriginal government. It also includes a corporation all the shares of which are owned by one or more persons each of which is Her Majesty, Her Majesty in right of a province, a municipality or another such corporation. It further includes a board or commission established by Her Majesty or Her Majesty in right of a province that performs an administrative or regulatory function of government. Lastly, it includes a board or commission established by one or more municipalities that performs an administrative or regulatory function of a municipality. This definition is used for the purposes of the definition "representative" of a government entity. "municipality" The new definition "municipality" means an incorporated city, town, village, metropolitan authority, township, district, county or rural municipality or other incorporated municipal body however designated. This definition is used for the purposes of amended paragraph 211(6)(j) and the definition "government entity". "registration information" The new definition "registration information" in respect of a holder of a business number defines a third subset of information that an official may share with a representative of a government entity under paragraph 211(6)(j). "Registration information" in respect of a holder of a business number means any information pertaining to the legal form of the business number holder (i.e. whether the business number is held by a natural person, a partnership, an incorporated entity, etc.), the type of activities carried on or proposed to be carried on by the holder, the date on which the business number was issued to the holder, the date on which the holder began activities, the date on which the business number assigned to the holder was changed and whether the holder is carrying on business activities or has ceased or resumed to carry on these activities (including the date and reason for doing so). "representative" The new definition "representative" of a government entity generally means a person who is employed in the service of, who occupies a position of responsibility in the service of, or who is engaged by or on behalf of a government entity. An official may now share information with a representative of a government entity under paragraph 211(6)(j). A person who was formerly employed in the service of, who formerly occupied a position of responsibility in the service of, or who was formerly engaged by or on behalf of a government entity is also considered a representative of a government entity, but only for the purposes of subsections 211(2), (3), (8) and (9) of the Act. This ensures among other things that, if such a person has obtained confidential information and contravenes subsection 211(2), the offence provided in subsection 221(1) of the Act applies to them as well. These amendments come into force on Royal Assent. Subclause 73(3) Provision of information EA, 2001 211(2) Subsection 211(2) of the Act prohibits the use or communication of confidential information by an official, except as authorized by section 211. The preamble to subsection 211(2) is amended to add a reference to a representative of a government entity, consequential on the introduction of the new definition "representative" in subsection 211(1). This ensures that representatives of a government entity are also prohibited from the unauthorized use or communication of confidential information. The amendment also ensures that the offence for contravening subsection 211(2), provided for in subsection 221(1) of the Act, applies to a representative of a government entity as well. This amendment comes into force on Royal Assent. Subclause 73(4) Evidence EA, 2001 211(3) Subsection 211(3) of the Act provides that, notwithstanding any other Act of Parliament or other law, no official can be compelled to produce evidence relating to any confidential information in connection with any legal proceedings. (This prohibition is overridden in certain cases described in subsection 211(4) of the Act). Subsection 211(3) is amended to extend its application to a representative of a government entity, in respect of confidential information legally obtained by that representative of a government entity. This amendment comes into force on Royal Assent. Subclause 73(5) Disclosure of personal information EA, 2001 211(6)(j) Subsection 211(6) of the Act sets out circumstances in which, and the purpose for which, confidential information may be disclosed. Paragraph 211(6)(j) allows an official (as defined in subsection 211(1)) to provide the business number, name, address, telephone number and facsimile number of the holder of a business number to another official of a department or agency of the Government of Canada or of a province solely for the purpose of the administration and enforcement of an Act of Parliament or a law of a province. This information can only be provided if that Act or law requires the holder of the business number to provide the information (other than the business number itself) to that government department or agency. Paragraph 211(6)(j) is amended to broaden both the information that an official may share and the types of officials that may gain access to that information. The amendment allows an official to share with a representative of a government entity (as newly defined in subsection 211(1)) the following types of information: • the business number and the name (including any trade name or other name used) of the holder of a business number; and • "contact information", "corporate information" and "registration information" – all as newly defined in subsection 211(1) – in respect of the holder of a business number. A common feature of this type of information is that it is generally publicly available such as through provincial corporate registries. These amendments come into force on Royal Assent. Subclause 73(6) Public disclosure and restriction EA, 2001 211(6.1), (6.2) and (6.3) New subsection 211(6.1) of the Act precludes an official from disclosing information described in paragraph 211(6)(j) in connection with a program, activity or service provided or undertaken by a government entity (as newly defined in subsection 211(1)) unless the government entity uses the business number as an identifier in connection with the program, activity or service. New subsection 211(6.2) allows the Minister to make public the business number and name of (including any trade name or other name used by) the holder of a business number in connection with a program, activity or service provided or undertaken by the Minister. New subsection 211(6.3) allows a representative of a government entity to make public the business number and the name of (including any trade name or other name used by) the holder of a business number in connection with a program, activity or service undertaken by the government entity if a representative of the government entity was provided with that information pursuant to paragraph 211(6)(j) and the government entity uses the business number as an identifier in connection with the program, activity or service. These amendments come into force on Royal Assent. Subclause 73(7) Disclosure to person or on consent EA, 2001 211(8) Subsection 211(8) of the Act provides that an official may provide confidential information relating to a person to the person or to other persons, if the person consents to the disclosure. Subsection 211(8) is amended to extend its application to a representative of a government entity, in respect of confidential information legally obtained by that representative of a government entity. This amendment comes into force on Royal Assent. Subclause 73(8) Appeal from order or direction EA, 2001 211(9) Subsection 211(9) of the Act provides that an official or authorized person may appeal an order or direction made in the course of or in connection with any legal proceeding requiring them to disclose confidential information. Subsection 211(9) is amended to extend its application to a representative of a government entity, in respect of confidential information legally obtained by that representative of a government entity. This amendment comes into force on Royal Assent. ### Excise Tax Act Clause 74 Communication of Information ETA 295 Section 295 of the Excise Tax Act (the "Act") prohibits officials and other persons from using or communicating confidential information obtained in the course of administering Part IX of the Act unless they are specifically authorized to do so by one of the exceptions found in that section. Subsections 295(1) to (3), (5), (6) and (7) are amended and new subsections 295(5.01) to (5.03) are added to facilitate greater use of the Canada Revenue Agency Business Number (BN) by other levels of government (BN Partners), with a view to reducing paper work and duplication of effort for business and government alike. Specifically, these amendments provide for: • broadening the BN-related information that may be shared with BN Partners; • expanding the type of government entities that qualify as BN Partners; and • allowing for the publication of the BN by BN Partners in connection with programs and services provided by the BN Partners. Subclauses 74(1) and (2) Definitions ETA 295(1) Subsection 295(1) of the Act provides definitions that apply for the purposes of section 295. The amendments to this subsections change the definition "confidential information" and add new definitions "aboriginal government", "contact information", "corporate information", "government entity", "municipality", "registration information", and "representative". "confidential information" "Confidential information" generally refers to information of any kind and in any form relating to one or more taxpayers that is obtained by or on behalf of the Minister of National Revenue (the "Minister") for the purposes of Part IX of the Act, or prepared from such information. The definition "confidential information" is amended to specify that for the purposes of applying subsections (3), (6) and (7) to a representative of a government entity, confidential information includes only the information provided in paragraph 295(5)(j) of the Act (i.e. business number-related information that the representative of a government entity has obtained from an official). "aboriginal government" The new definition "aboriginal government" has the same meaning as under subsection 2(1) of the Federal-Provincial Fiscal Arrangements Act. That Act defines an aboriginal government to mean an Indian government, an Inuit government or a Métis government, or the "council of the band" as defined in subsection 2(1) of the Indian Act. That provision of the Indian Act in turn defines a council of the band as, • in the case of a band to which section 74 of the Indian Act applies, the council established pursuant to that section; and • in the case of a band to which section 74 of the Indian Act does not apply, the council chosen according to the custom of the band, or where there is no council, the chief of the band chosen according to the custom of the band. "contact information" The new definition "contact information" in respect of the holder of a business number defines one subset of information that an official may, under amended paragraph 295(5)(j), share in respect of the holder of the business number. The definition refers to the name, address, telephone number, facsimile number and preferred language of communication of the business number holder and any other specified similar information obtained by the Minister. To accommodate cases where the business number holder is not a natural person, contact information also includes this information in respect of one or more of the holder’s trustees, members or officers, as appropriate. "corporate information" The new definition "corporate information" in respect of a holder of a business number defines a second subset of information that an official may share with a representative of a government entity in respect of a corporation under paragraph 295(5)(j). "Corporate information" means the name (including the number assigned by the incorporating authority), date of incorporation, jurisdiction of incorporation and any information on the dissolution, reorganization, amalgamation, winding-up or revival of the corporation. "government entity" The new definition "government entity" means any of several types of federal, provincial, municipal and aboriginal entities. A "government entity" includes a department or agency of the Government of Canada or of a province, a municipality or an aboriginal government. It also includes a corporation all the shares of which are owned by one or more persons each of which is Her Majesty in right of Canada, Her Majesty in right of a province, a municipality or another such corporation. It further includes a board or commission established by Her Majesty in right of Canada or Her Majesty in right of a province that performs an administrative or regulatory function of government. Lastly, it includes a board or commission established by one or more municipalities that performs an administrative or regulatory function of a municipality. This definition is used for the purposes of the definition "representative" of a government entity. "municipality" The new definition "municipality" restricts, for the purposes of section 295, the meaning of "municipality" as defined in section 123(1) of the Act by excluding a local authority determined by the Minister to be a municipality. "registration information" The new definition "registration information" in respect of a holder of a business number defines a third subset of information that an official may share with a representative of a government entity under paragraph 295(5)(j). "Registration information" in respect of a holder of a business number means any information pertaining to the legal form of the business number holder (i.e. whether the business number is held by a natural person, a partnership, an incorporated entity, etc.), the type of activities carried on or proposed to be carried on by the holder, the date on which the business number was issued to the holder, the date on which the holder began activities, the date on which the business number assigned to the holder was changed and whether the holder is carrying on business activities or has ceased or resumed to carry on these activities (including the date and reason for doing so). "representative" The new definition "representative" of a government entity generally means a person who is employed in the service of, who occupies a position of responsibility in the service of, or who is engaged by or on behalf of a government entity. An official may now share information with a representative of a government entity under paragraph 295(5)(j). A person who was formerly employed in the service of, who formerly occupied a position of responsibility in the service of, or who was formerly engaged by or on behalf of a government entity is also considered a representative of a government entity, but only for the purposes of subsections 295(2), (3), (6) and (7) of the Act. This ensures among other things that, if such a person has obtained confidential information and contravenes subsection 295(2), the offence provided in subsection 328(1) of the Act applies to them as well. These amendments come into force on Royal Assent. Subclause 74(3) Provision of information ETA 295(2) Subsection 295(2) of the Act prohibits the use or communication of confidential information by an official, except as authorized by section 295. The preamble to subsection 295(2) is amended to add a reference to a representative of a government entity, consequential on the introduction of the new definition "representative" in subsection 295(1). This ensures that representatives of a government entity are also prohibited from the unauthorized use or communication of confidential information. The amendment also ensures that the offence for contravening subsection 295(2), provided for in subsection 328(1) of the Act, applies to a representative of a government entity as well. This amendment comes into force on Royal Assent. Subclause 74(4) Evidence ETA 295(3) Subsection 295(3) of the Act provides that, notwithstanding any other Act of Parliament or other law, no official can be compelled to produce evidence relating to any confidential information in connection with any legal proceedings. (This prohibition is overridden in certain cases described in subsection 295(4) of the Act). Subsection 295(3) is amended to extend its application to a representative of a government entity, in respect of confidential information legally obtained by that representative of a government entity. This amendment comes into force on Royal Assent. Subclause 74(5)and (6) Disclosure of personal information ETA 295(5) Subsection 295(5) of the Act sets out circumstances in which, and the purpose for which, confidential information may be disclosed. Paragraph 295(5)(j) allows an official (as defined in subsection 295(1)) to provide the business number, name, address, telephone number and facsimile number of the holder of the business number to another official of a department or agency of the Government of Canada or of a province solely for the purpose of the administration and enforcement of an Act of Parliament or a law of a province. This information can only be provided if that Act or law requires the holder of the business number to provide the information (other than the business number itself) to that government department or agency. Paragraph 295(5)(j) is amended to broaden both the information that an official may share and the types of officials that may gain access to that information. The amendment allows an official to share with a representative of a government entity (as newly defined in subsection 295(1)) the following types of information: • the business number and the name (including any trade name or other name used) of the holder of a business number; and • "contact information", "corporate information" and "registration information" – all as newly defined in subsection 295(1) – in respect of the holder of a business number. A common feature of this type of information is that it is generally publicly available such as through provincial corporate registries. Subparagraph 295(5)(d)(i) is amended to refer to the new definition of "aboriginal government" in subsection 295(1). These amendments come into force on Royal Assent. Subclause 74(7) Public disclosure and restriction ETA 295(5.01), (5.02) and (5.03) New subsection 295(5.01) of the Act precludes an official from disclosing information described in paragraph 295(5)(j) in connection with a program, activity or service provided or undertaken by a government entity (as newly defined in subsection 295(1)) unless the government entity uses the business number as an identifier in connection with the program, activity or service. New subsection 295(5.02) allows the Minister to make public the business number and name of (including any trade name or other name used by) the holder of a business number in connection with a program, activity or service provided or undertaken by the Minister. New subsection 295(5.03) allows a representative of a government entity to make public the business number and the name of (including any trade name or other name used by) the holder of a business number in connection with a program, activity or service undertaken by the government entity if a representative of the government entity was provided with that information pursuant to paragraph 295(5)(j) and the government entity uses the business number as an identifier in connection with the program, activity or service. These amendments come into force on Royal Assent. Subclause 74(8) Disclosure to taxpayer or on consent ETA 295(6) Subsection 295(6) of the Act provides that an official may provide confidential information relating to a taxpayer to the taxpayer or to other persons, if the taxpayer consents to the disclosure. Subsection 295(6) is amended to extend its application to a representative of a government entity, in respect of confidential information legally obtained by that representative of a government entity. This amendment comes into force on Royal Assent. Subclause 74(9) Appeal from order or direction ETA 295(7) Subsection 295(7) of the Act provides that an official or authorized person may appeal an order or direction made in the course of or in connection with any legal proceeding requiring them to disclose confidential information. Subsection 295(7) is amended to extend its application to a representative of a government entity, in respect of confidential information legally obtained by that representative of a government entity. This amendment comes into force on Royal Assent. [1] References in this and subsequent examples to currency are to Canadian dollars except where indicated. F$ means foreign currency units. T1, T2 and T3 are three separate times that occur in sequence (with T1 occurring first).

[2] References to the "specified manner" of reading subsection 96(1) of the Act indicate that appropriate modifications will be made application to the application of, in particular, paragraph 96(1)(d) in the context.

[3] What are described in these notes as the “preceding” taxation years are in certain cases described slightly differently – although to the same general effect – in the relevant legislation, both actual and proposed.