Archived - Explanatory Notes in Respect of Legislative Proposals Relating to the Income Tax Act and Related Acts and Regulations

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

September 2010


Preface

These explanatory notes describe proposed amendments to the Income Tax Act, the Income Tax Amendments Act, 2000, the Income Tax Conventions Interpretation Act,the Income Tax Regulations, the Budget and Economic Statement Implementation Act, 2007, the Canada Pension Plan, the Employment Insurance Act, the Universal Child Care Benefit Act, the Air Travellers Security Charge Act, the Excise Act, the Excise Act, 2001, the Excise Tax Act, the Brewery Departmental Regulations, the Brewery Regulations, and the New Harmonized Value-added Tax System Regulations to implement certain tax measures for the Budget announced on March 4, 2010 and to implement certain other tax measures. 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

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.


Table of Contents

Clause in Legislation Section of the Act Amended Topic Page
Part 1 - Amendments in Respect of Foreign Investment Entities and Non-resident Trusts
Income Tax Act
1 12 Income from business or property. 13
2 51 Convertible property 13
3 53 Adjustment to cost base. 14
4 75 Trusts – Attribution. 15
5 87 Amalgamations – Non-resident entities 15
6 94 Non-resident trusts.. 16
7 94.1 Offshore investment fund property and foreign investment entities... 71
8 94.2 Investment in non-resident commercial trusts 75
9 104 Trusts and their beneficiaries.. 76
10 107 Application of subsection 75(2)..... 79
11 108 Trusts 79
12 122 Tax payable by inter vivos trust..... 80
13 128.1 Changes in residence. 80
14 152 Assessment and reassessment...... 83
15 160 Tax liability – Non-arm's length transfer of property 83
16 162 Penalties 84
17 163 Penalties 84
18 215 Withholding and remittance of tax. 86
19 216 Deduction and payment of tax. 86
20 233.2 Foreign reporting requirements...... 87
21 233.3 Returns in respect of foreign property. 90
22 233.5 Due diligence exception 91
23 248 Interpretation. 92
Income Tax Amendments Act, 2000
24 53 Inter vivos transfer of property by an individual...... 93
25 80 Disposition by taxpayer of capital interest.. 93
Income Tax Conventions Interpretation Act
26 4.3 Application of section 94 of the Income Tax Act...... 94
Income Tax Regulations
27 202 Payments to non-residents...... 95
28 5909 Prescribed circumstances 95
Part 2 - Amendments in Respect of Foreign Affiliates
Income Tax Act
29 53 Adjustments to Cost Base....... 96
30 88 Winding-up. 96
31 92 Adjustment for Prescribed Amount...... 97
32 93 Election for Disposition of Share in Foreign Affiliate.. 98
33 95 Definitions... 99
34 152 Assessment and Reassessment..... 101
35 161 Effect of Carryback of Loss, etc..... 101
36 164 Effect of Carryback of Loss, etc..... 102
37 256 Acquiring Control..... 102
38 261 Functional Currency Tax Reporting...... 102
Budget and Economic Statement Implementation Act, 2007
39 26 104
Income Tax Regulations
40 5900 Dividends out of Various Surplus Accounts... 106
41 5902 Subsection 93(1) Elections....... 107
42 5903 Foreign Accrual Property Losses.. 110
43 5904 Participating Percentage 114
44 5905 Reorganizations. 114
45 5906 Permanent Establishments....... 125
46 5907 Interpretation. 126
47 5908 Partnerships. 137
48 5910 Foreign Oil and Gas Businesses..... 143
49 8201 Permanent Establishments....... 144
50   Elections under Bill C-28 144
51   Consolidated Net Surplus Election 145
52   Modified Consolidated Net Surplus Election. 145
53   Assessments. 145
Part 3 - Other Amendments in Respect of Income Tax
Income Tax Act
54 6 Employment Income. 147
55 7 Employee Stock Options. 148
56 18 Prohibited Deductions.. 151
57 20 Deductions.. 152
58 33.1 International Banking Centres – Election.... 152
59 40 Capital Gains 153
60 56 Other Income Inclusions. 153
61 60 Deductions in Computing Income. 154
62 60.02 Rollover to Registered Disability Savings Plan (RDSP)... 155
63 66 Exploration and Development Expenses...... 159
64 70 Amounts Receivable – Rights or Things..... 160
65 75 Attribution Rules – Trusts – Exceptions..... 160
66 87 Amalgamations – Employee Life and Health Trust Contributions 161
67 91 Denial of Foreign Accrual Tax. 161
68 95 Foreign Accrual Tax. 163
69 104 Deduction in Computing Income of Trust... 164
70 107.1 Distribution by Employee Trust, Employee Benefit Plan or               Similar Trust. 164
71 107.4 Qualifying Disposition.. 164
72 108 Trusts – Definitions. 165
73 110 Deductions.. 165
74 111 Loss Carryovers. 167
75 118.7 Credit for EI Premiums and CPP Contributions... 169
76 122.5 GST/HST Credit. 169
77 122.6 Canada Child Tax Benefit - Definitions 171
78 122.61 Canada Child Tax Benefit 172
79 122.7 Working Income Tax Benefit... 173
80 126 Denial of Foreign Tax Credit.... 173
81 127.55 Application of Section 127.5.... 175
82 128.1 Changes in Residence 175
83 129 Dividend Refund to Private Corporation..... 176
84 131 Capital Gains Refund to Mutual Fund Corporation.. 177
85 132 Capital Gains Refund to Mutual Fund Trust.. 177
86 133 Allowable Refund to Non-resident-owned Investment Corporation... 177
87 138 Insurance Corporations 178
88 144.1 Deferred and Special Income Arrangements.. 181
89 146.4 Registered Disability Savings Plan (RDSP) – Definitions 188
90 149.1 Charities 189
91 152 Assessment. 192
92 153 Withholding 193
93 161 Interest on Penalties. 195
94 161.1 Contents of Application for Offset of Refund Interest and Arrears     Interest.... 195
95 163 Partnership Liable to Penalty... 196
96 164 Refunds. 196
97 165 Objections to Assessments..... 198
98 166.1 Service of Objections to Assessments 199
99 169 Appeal... 199
100 180.1 Special Tax and Relief for Deferral of Stock Option Benefit.... 199
101 180.2 Old Age Security Benefit. 201
102 184 Election to Treat Excess as Separate Dividend... 202
103 185.1 Election to Treat Excessive Eligible Dividend Designation as an    Ordinary Dividend. 202
104 188.1 Penalties for Charities 202
105 189 Reduction of Revocation Tax Liability. 203
106 191.2 Election.. 203
107 191.3 Consideration for Agreement Respecting Liability for Tax..... 204
108 207 Refund of Part XI Tax. 204
109 207.07 Refund of Part XI.01 Tax 205
110 207.7 Refund of Part XI.3 Tax. 205
111 212 Tax on Income from Canada of Non-resident Persons 206
112 222 Limitation Period 206
113 225.1 Collection Restrictions.. 206
114 227 Assessment. 208
115 237.3 Reporting for Tax Avoidance Transactions 208
116 244 Procedure and Evidence 226
117 245 Request for Adjustments 227
118 248 Interpretation. 228
119 256 Acquiring Control..... 229
Canada Pension Plan
120 38 Refund of Excess Contribution in Respect of Self-employed           Earnings   232
Employment Insurance Act
121 85 Mailing or Sending date 233
122 102 Date when Assessment Made. 234
123 152.3 Refund of Excess Premium in Respect of Self employed Earnings 234
Universal Child Care Benefit Act
124 2 Definitions... 235
125 4 Amount of Payment. 235
Income Tax Regulations
126 1100 Specified Leasing Property...... 236
127 1104 Classes 43.1 and 43.2 – Clean Energy Generation Assets 236
128 1219 Canadian Renewable and Conservation Expenses.... 237
129 1402 Insurance Business Policy Reserves – Special Rules.. 237
130 1406 Insurance Business Policy Reserves.... 238
131 1408 Interpretation. 239
132 2400 Insurers. 240
133 2401 Designation Rules.... 242
134 3700 Interpretation. 243
135 3701 Disbursement Quota 243
136 3702 Determination of Value. 243
137 5907 Denial of Underlying Foreign Tax.. 244
138 8600 Definitions... 244
139 9500 Prescribed Payments 245
140 Class 10 in Schedule II Class 10 in Schedule II.. 245
141 Class 30 in Schedule II Class 30 in Schedule II.. 246
142 Class 43.1 in Schedule II Class 43.1 in Schedule II 246
Part 4 - Amendments in Respect of Excise Duties and Sales and Excise Taxes
Air Travellers Security Charge Act
143 2 Definitions... 249
144 5.1 Associated Persons. 250
145 16 and 16.1 Fiscal Periods and Reporting Periods... 250
146 17 Returns and Payments.. 252
147 30 Waiving or Reducing Interest.      252
148 32 Deduction of Refund 252
149 33 Restriction.... 253
150 35 Restriction re Trustees.. 253
151 39 Refund on Reassessment      253
152 53 Failure to File a Return when Required 254
153 55 Waiving or Cancelling Penalties.... 254
154 72 Limitation Period 254
155 83 Evidence and Procedure 255
Excise Act
156 36.1 Determination of Periods for Semi-Annual Returns.. 257
157 37 Time for Making Return 257
Excise Act, 2001 
158 2 Definitions 259
159 6 Associated Persons 260
160 159 Fiscal Periods 260
161 159(1.1) Determination of fiscal half-years 260
162 159.1 Reporting Periods 261
163 160 Filing by Licensee 262
164 170 Minimum Interest and Penalty 262
165 176 Restriction 262
166 178 Restriction re Trustees 263
167 188 Assessments 263
168 191 Limitation Period for Assessments 263
169 193 Scope of Notice 264
170 212 Bankruptcies 264
171 251.1 Failure to File Return 264
172 253 False Statements or Omissions 265
173 255.1 Waiving or Reducing Failure to File Penalty 265
174 284 Limitation Period 265
175 297 Liability re Transfers not at arm's length 266
176 301 Evidence and Procedure 266
Excise Tax Act
177 2 Associated Persons. 268
178 58.1 Definitions 268
179 78 Determination of Fiscal Half-Years 269
180 78.1 Reporting Periods 270
181 79 Returns and Payments 270
182 82 Limitation Period 271
183 95.1 Failure to File a Return when Required 271
184 106.1 Presumption. 272
185 274 Request for Adjustments 273
186 274.2 Request for Adjustments 273
187 313 Limitation Period 273
188 315 Payment of Remainder.. 274
189 335 Evidence and Procedure 274
Brewery Departmental Regulations
190 7 Time for Making Return 276
Brewery Regulations
191 5 Excise Duty Payments 276
New Harmonized Value-added Tax System Regulations
192 37 Request for Adjustments 277

Part 1
Amendments in Respect of Foreign Investment Entities and Non-resident Trusts

Income Tax Act

Clause 1

Income from Business or Property

ITA
12(1)(k)

Section 12 of the Act provides for the inclusion of various amounts in computing a taxpayer's income for a taxation year from business or property. Paragraph 12(1)(k) refers to certain amounts required by any of existing sections 90 to 95 (i.e., subdivision i of Division B of the Act) to be so included.

Paragraph 12(1)(k) is amended so that it refers more generally to amounts required to be included in computing income under that subdivision. This would include amounts required to be included by subsection 94(16) or (17) of the Act, as well as amounts required to be included by section 91 of the Act where it applies because of new section 94.2 of the Act. For more information, see the commentary on subsections 94(16) and (17) and section 94.2.

This amendment applies to taxation years that end after 2006.

Clause 2

Convertible Property

ITA
51

Section 51 of the Act generally permits a tax-deferred transfer of property where a taxpayer, pursuant to a right of conversion, exchanges capital property (referred to in the commentary on this section as the "convertible property") that is a share, bond, debenture or note of a corporation for other capital property that is a share of the capital stock of the corporation.

ITA
51(1)(c)

Paragraph 51(1)(c) of the Act provides that, except for the purpose of subsection 20(21), an exchange described in paragraph 51(1)(a) or (b) is deemed not to be to be a disposition of the convertible property.

Paragraph 51(1)(c) is amended to add a reference to paragraph 94(2)(m).

This amendment applies to taxation years of a taxpayer that end after 2006. It also applies to a taxation year of a taxpayer that ends before 2007 if subsection 94(3) of the Act applies (because of a valid election by a trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year of the taxpayer.

Clause 3

Adjustment to Cost Base

ITA
53

Section 53 of the Act sets out rules for determining the adjusted cost base (ACB) of property. Certain adjustments are made under this section. Subsection 53(1) provides for additions in computing the ACB of a property, and subsection 53(2) for deductions in computing the ACB of a property.

ITA
53(1)(d.1)

Paragraph 53(1)(d.1) of the Act, applied together with paragraph 94(5)(a) of the Act, provides for an addition in computing the adjusted cost base (ACB) to a taxpayer of the taxpayer's capital interest in a trust to which existing paragraph 94(1)(d) applies. Paragraph 94(5)(a) generally describes amounts required to be included in the taxpayer's income under subsection 91(1) or (3) of the Act in respect of the trust, which apply where paragraph 94(1)(d) treats the trust as, in effect, a controlled foreign affiliate of the taxpayer.

Paragraph 53(1)(d.1) is amended to ensure that the historical ACB additions are maintained, notwithstanding the replacement of the rules in existing section 94, and to provide for ACB additions at a particular time in respect of amounts included, under subsection 91(1) or (3) of the Act (i.e., where they apply because of section 94.2 of the Act, the successor to paragraph 94(1)(d)), in the taxpayer's income for a taxation year that ends at or before the particular time.

This amendment applies to taxation years that end after 2006. It also applies in computing the adjusted cost base to a taxpayer of a capital interest in a trust for an earlier taxation year if new subsection 94(3) of the Act applies to the trust (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) for a taxation year that ends in that earlier taxation year of the taxpayer.

ITA
53(2)(b.1)

Paragraph 53(2)(b.1) of the Act, applied together with existing paragraph 94(5)(b), provides for a deduction in computing the ACB to a taxpayer of the taxpayer's capital interest in a trust to which existing paragraph 94(1)(d) applies. Paragraph 94(5)(b) generally describes amounts for which a deduction may be claimed under subsection 91(2) or (4) of the Act in respect of the trust, which apply where paragraph 94(1)(d) treats the trust as, in effect, a controlled foreign affiliate of the taxpayer.

Paragraph 53(2)(b.1) is amended to ensure that historical ACB deductions are maintained, notwithstanding the replacement of the rules in existing section 94, and to provide for ACB deductions at a particular time in respect of amounts deducted, under subsections 91(2) or (4) of the Act (i.e., where they apply because of section 94.2 of the Act, the successor to paragraph 94(1)(d)), in the taxpayer's income for a taxation year that ends at or before the particular time.

This amendment applies to taxation years that end after 2006. It also applies in computing the adjusted cost base to a taxpayer of a capital interest in a trust for an earlier taxation year if new subsection 94(3) of the Act applies to the trust (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) for a taxation year that ends in that earlier taxation year of the taxpayer.

Clause 4

Trusts – Attribution

ITA
75(2) and (3)

Subsection 75(2) of the Act generally provides for the attribution of income derived from certain trust property to a person resident in Canada where the property was received by the trust from the person and can revert to the person (or pass to other persons determined by that person). Subsection 75(3) of the Act exempts property held by certain trusts from this attribution rule.

Subsection 75(3) is amended by adding references to new paragraphs 75(3)(c.2) and (c.3).

New paragraph 75(3)(c.2) of the Act applies to a property of a trust if the trust acquired the property from an "electing contributor" (as defined in new subsection 94(1)) in respect of the trust. An electing contributor is a person that has validly elected under section 94 of the Act to have new subsection 94(16) of the Act apply in respect of the person and the trust. Under these circumstances, paragraph 75(2)(c.2) ensures that subsection 94(16), and not 75(2), applies in determining amounts to be attributed to the person from the trust in respect of the property.  See also the commentary on subsection 107(4.1).

New paragraph 75(3)(c.3) of the Act ensures that subsection 75(2) does not apply to property held by a trust in respect of which all of the contributors are either non-resident or recent immigrants to Canada (i.e., none of the contributors to the trust has been resident in Canada for more than 60 months). This exception is consistent with similar 60-month exemptions in section 94 (see subsection 94(3) and the definitions "connected contributor" and "resident contributor" in subsection 94(1)) and section 94.2.

Paragraph 75(3)(c.2) applies to taxation years that end after March 4, 2010.  Paragraph 75(2)(c.3) applies to taxation years that begin after 2000.

Clause 5

Amalgamations – Non-resident Entities

ITA
87(2)(j.95)

Section 87 of the Act sets out rules that apply on the amalgamation (as defined in subsection 87(1)) of two or more taxable Canadian corporations. The amalgamated corporation is generally treated as a continuation of the predecessor corporations for the purposes of the Act.

New paragraph 87(2)(j.95) of the Act provides that, where there has been an amalgamation of two or more taxable Canadian corporations, the amalgamated corporation is deemed to be a continuation of its predecessor corporations for the purposes of sections 94, 94.1 and 94.2, which relate to foreign trusts and non-resident entities. Thus, for example, an amalgamated corporation will be considered to be a "contributor" and an "electing contributor" (as defined in new subsection 94(1)) to a trust if any predecessor corporation was a contributor and electing contributor to the trust.

Because of the operation of paragraph 88(1)(e.2), new paragraph 87(2)(j.95) also applies to windings-up to which section 88 applies.

This amendment applies to taxation years that end after 2000.

Clause 6

Non-resident Trusts

ITA
94

Overview

Existing Rules

Section 94 of the Act sets out rules that tax certain income earned by certain non‑resident trusts. Section 94 generally applies if a person resident in Canada has transferred or loaned property to a non‑resident trust that has one or more beneficiaries that are resident in Canada.

Section 94 uses two different methods to impose tax, depending on the terms of the non‑resident trust.

If the amount to be distributed to a beneficiary of the trust depends upon a discretionary power, paragraph 94(1)(c) deems the trust to be resident in Canada for the purposes of Part I of the Act and deems its taxable income for tax purposes to be the total of its Canadian source income and its foreign accrual property income ("FAPI"), if any. Each beneficiary is jointly and severally liable to pay the Canadian tax of the trust. However, the liability can be enforced against a particular beneficiary only to the extent that the beneficiary has received a distribution from the trust or proceeds from the sale of an interest in the trust.

For other non‑resident trusts to which section 94 applies, paragraph 94(1)(d) provides that it is to be treated in much the same manner that a non‑resident corporation is treated. If a Canadian resident beneficiary holds an interest in the trust with a fair market value equal to 10% or more of the total fair market value of all beneficial interests in the trust, the trust is deemed to be a controlled foreign affiliate of the beneficiary. Consequently, the FAPI rules apply to the trust and the beneficiary, requiring the beneficiary to include in income, under section 91 of the Act, a percentage of the trust's FAPI. On the other hand, beneficiaries whose beneficial interests are less than 10% of the total fair market value of all interests in the trust may be subject to tax under the offshore investment fund rules in section 94.1.  If section 94.1 does not apply, such beneficiaries are generally taxed in respect of trust-level income only if trust income becomes payable to them in the year in which it arises or they otherwise enjoy certain taxable benefits in respect of the trust.

New Rules

New section 94 of the Act takes a different approach to the taxation of non‑resident trusts (NRTs). In general, if a Canadian resident contributes property to a NRT (other than an "exempt foreign trust"), the NRT is deemed to be resident in Canada for a number of purposes, and the contributor (excepting electing contributors in respect of the NRT), the NRT and certain Canadian resident beneficiaries of the NRT may all become jointly and severally, or solidarily, liable to pay Canadian tax on the income of the trust.

More specifically, new section 94 divides the NRT into two notional portions. The "resident portion" of the trust generally includes all property of the trust in respect of which there has been a contribution by a current or former resident of Canada, and certain other non-contributed amounts. The "non-resident portion" of the trust generally includes all other property of the trust. The NRT generally is not taxed on income derived from its non-resident portion, unless the income is from certain Canadian sources.

In computing its income under the Act, the NRT will have the ordinary deductions available, under subsections 104(6) and (12), for certain amounts in respect of beneficiaries. After claiming any such deductions, the NRT will then have available a deduction in respect of amounts included in the income of an "electing contributor" in respect of the trust.

New section 94 is intended to apply to NRTs where the amount to be distributed to a beneficiary of the trust depends upon a discretionary power, but may also apply to a trust in which all interests are "specified fixed interests" if the trust is not an "exempt foreign trust" as defined in subsection 94(1) (which can include cases where the trust elects not to be an exempt foreign trust). The new rules are not intended to impact upon legitimate commercial trusts. In respect of these NRTs, existing paragraph 94(1)(d) is carried forward, with some modifications, as new section 94.2 of the Act. For more information, see the commentary on new section 94.2.

The English-language expression "jointly and severally" no longer exists in the civil law of the province of Quebec and has been replaced in that civil law with the expression "solidarily". In the English-language version of section 94, the expression "solidarily" is added to the expression "jointly and severally", which latter expression is maintained for common-law purposes. The French-language version of new section 94 uses only the expression "solidairement" as this expression is appropriate for both the civil and common-law. These changes ensure that the Act appropriately reflects both the civil law of the province of Quebec and the law of other provinces.

Except as indicated otherwise, the amendments to section 94 apply to trust taxation years that end after 2006. They also apply to each of a trust's taxation years in which it exists and that end after 2000 and before 2007, and to each taxation year of the beneficiaries under, and contributors to, the trust in which such a trust taxation year ends, if the trust

  • was created in one of those taxation years, and
  • elects in writing to have new section 94 of the Act apply to each of those taxation years of the trust by filing the election with the Minister of National Revenue on or before the trust's filing-due date for the trust's taxation year in which new section 94 is assented to.

Note that, under the coming-into-force provision for new section 94, any election or form (but for greater certainty, not including returns of income) referred to in new section 94 that would otherwise be required to be filed before 120 days after Royal Assent of the Act giving effect to these changes is deemed to have been filed with the Minister of National Revenue on a timely basis if it is filed with the Minister of National Revenue within 365 days after Royal Assent.

For more detail on filing obligations regarding returns of income, contact the Canada Revenue Agency (CRA).

The following table briefly summarizes section 94 and related rules.

Issue Summary References
1. Which trusts are subject to the new NRT rules? A. In general, a trust (other than an exempt foreign trust) will be subject to tax for a taxation year as a trust resident in Canada if a contribution was made to the trust by a person (other than a recent immigrant to Canada or an exempt taxpayer) that is resident in Canada at a specified time (generally, the end of the year). s. 94(3)  "exempt person" – s. 94(1) "exempt foreign trust" – s. 94(1) "contribution" – s. 94(1) and (2) "resident contributor" – s. 94(1) "specified time" – s. 94(1)
  B. In addition, a trust (other than an exempt foreign trust) will generally be subject to Canadian tax for a taxation year if there is a resident beneficiary under the trust. More specifically, if: a contribution was made by a person when the person was resident in Canada (or generally within a 60‑month period before the person became resident in Canada or within a 60‑month period after the person ceased to be resident in Canada), where the contributing person is an individual (other than a trust), at the specified time the individual had been resident in Canada for more than 60 months, and at the specified time there is a person (other than a successor beneficiary) that is resident in Canada and is a beneficiary under the trust. s. 94(3) and (10) "beneficiary" – s. 94(1) "contribution" – s. 94(1) and (2) "connected contributor" – s. 94(1) "non‑resident time" – s. 94(1) "resident beneficiary" – s. 94(1) "specified time" – s. 94(1) "successor beneficiary" – s. 94(1)
2. Who is responsible for the tax payable by a NRT? The trust is required to pay its Canadian taxes. If it fails to do so, each contributor (other than an electing contributor) referred to in 1(A) and/or each beneficiary referred to in 1(B) is jointly and severally or solidarily liable with the trust for the tax. However, the amount recoverable from a person that is only a beneficiary is limited to the beneficiary's recovery limit. Relief is also available in some cases for a contributor whose contribution to the trust is insignificant relative to other contributions made to the trust. Jointly and severally, or solidarily, liable: paragraphs s. 94(3)(d) and (e) Limit to amount recoverable – s. 94(7) Recovery limit – s. 94(8) Determination of fair market value – s. 94(9) Definitions – s. 94(1)
3. Where the NRT rules apply to a trust for a taxation year, how will the trust's tax liabilities be calculated? A. Canadian rules generally apply to the trust as if the trust were resident in Canada throughout the year for the purpose of computing the trust's income. s. 94(3)(a) and 94(4)
  B. Explicit rule treats the trust as becoming resident in Canada, with resulting adjustment to cost amount of property. s. 94(3)(c)
  C. The trust's tax liabilities will be reduced by amounts attributed to electing contributors in respect of the trust. "electing contributor" – s. 94(1) s. 94(16) and (17)
  D. The trust's income for Canadian tax purposes will be computed without regard to its property income from the non-resident portion (except for certain Canadian source amounts). "non-resident portion" – s. 94(1) "resident portion" – s. 94(1) s. 94(3)(f)
  E. Part XII.2 does not apply to the trust. Explicit exemption from Part XIII tax on amounts distributed to the trust, although payer must still withhold and trust is granted a credit for such amounts withheld. Part XIII tax will generally apply to amounts (other than exempt amounts) paid or credited by the trust to non‑resident beneficiaries. s. 94(3)(a)(viii) and (ix), (3)(g) and (4)(c) and 215 and 216(4.1) "exempt amount" – s. 94(1)
  F. Flow-through of income to resident and non‑resident beneficiaries permitted, subject to special rules in the event that Canadian-source income is distributed to non‑residents. s. 94(3)(a)(ix) and 104(7.01) - special rules
4. What is the treatment of an investment in a commercial NRT? Where the trust is a paragraph (h) exempt foreign trust, a Canadian investor with a 10% or more interest in the trust (together with persons not dealing at arm's length with the investor), or who has contributed restricted property to the trust, will be subject to a modified foreign accrual property income (FAPI) regime under section 94.2. Other investors will be subject to offshore investment property regime in section 94.1 of the Act. Remittances out of a trust's current year income remain taxable in the investor's hands under subsection 104(13), with relief from double taxation provided. "exempt foreign trust" – s. 94(1) "specified fixed interest" – s. 94(1) s. 94(15)(a)(ii) and (c) s. 94.1 and 94.2

Definitions

ITA
94(1)

New subsection 94(1) of the Act defines a number of expressions that apply for the purpose of section 94.

"arm's length transfer"

A loan or transfer of property by a person or partnership in respect of a trust will generally not be considered a "contribution" to the trust where the loan or transfer is an "arm's length transfer". In these circumstances, that loan or transfer generally will not cause the transferor to be considered to be a "contributor" to the trust. Accordingly, subsection 94(3) does not apply to a non‑resident trust as a consequence only of an "arm's length transfer" in respect of the trust unless a deemed contribution or deemed contributor rule applies. For more information on the definitions "contribution" and "contributor" in subsection 94(1), see the commentary on those definitions.

The definition "arm's length transfer" also is relevant in applying some of the rules in new subsection 94(2).

If property transferred or loaned is "restricted property", the transfer or loan will not be an arm's length transfer. For more information on the definition "restricted property", see the commentary on that definition and subsection 94(14).

Under paragraph (a) of the definition, a transfer or loan will be an arm's length transfer only if it is reasonable to conclude that none of the reasons (determined by reference to all the circumstances including the terms of a trust, an intention, the laws of a country or the existence of an agreement, a memorandum, a letter of wishes or any other arrangement) for the transfer is the acquisition at any time by any person or partnership of an interest as a beneficiary under a non‑resident trust. Thus, if any person receives a beneficial interest in a non-resident trust as a result of a particular transfer or loan of property or if it is reasonable to conclude that one of the reasons for the transfer was to facilitate the acquisition of such an interest, the transfer will not be an arm's length transfer.

Under subparagraphs (b)(i) and (ii) of the definition, an arm's length transfer includes, in general terms, an arm's length return on an investment (conferred by the entity in which the investment is made) and certain payments made by a corporation on a reduction of the paid-up capital in respect of shares of a class of the corporation's capital stock.

Under subparagraph (b)(iii) of the definition, an arm's length transfer includes a transfer (other than of restricted property) in exchange for which the recipient transfers or loans property (other than restricted property) to the transferor, or becomes obligated to so transfer or loan such property, and for which it is reasonable to conclude

  • having regard only to the transfer and the exchange that the transferor would have been willing to make the transfer if the transferor dealt at arm's length with the recipient, and
  • that the terms and conditions, and circumstances, under which the transfer was made would have been acceptable to the transferor if the transferor dealt at arm's length with the recipient.

An arm's length transfer described in subparagraph (b)(iii) will include most purchases and sales made to and by persons dealing at arm's length with one another. It may also include a repayment of a loan provided that the amounts of any interest and principal repaid were amounts that the transferor would have been willing to pay if the transferor dealt at arm's length with the trust.

Under subparagraph (b)(iv) of the definition, an arm's length transfer includes a transfer that is made in satisfaction of an obligation that arose because of a transfer to which subparagraph (b)(iii) applied, if

  • the transferor would have been willing to make the transfer if the transferor dealt at arm's length with the recipient, and
  • the terms and conditions, and circumstances, under which the transfer was made would have been acceptable to the transferor if the transferor dealt at arm's length with the recipient.

Under subparagraph (b)(v) of the definition, an arm's length transfer includes a transfer that is a payment of an amount owing by the transferor under a written agreement the terms and conditions of which, when entered into, were terms and conditions that, having regard only to the amount owing and the agreement, would have been acceptable to the transferor if the transferor dealt at arm's length with the recipient.

Under subparagraph (b)(vi) of the definition, an arm's length transfer includes a transfer that is a payment made before 2002 to a trust, to a corporation controlled by the trust or to a partnership of which the trust is a majority interest partner, in repayment of or otherwise in respect of a particular loan made by the trust, corporation or partnership, as the case may be, to the transferor. The conditions that must be met in order to qualify as an arm's length transfer described in subparagraph (b)(vi) of the definition are similar to the circumstances prescribed by former section 5909 of the Income Tax Regulations (the "Regulations").

Finally, under subparagraph (b)(vii) of the definition, an arm's length transfer includes a transfer that is a payment made after 2001 to a trust, to a corporation controlled by the trust or to a partnership of which the trust is a majority interest partner, in repayment of or otherwise in respect of a particular loan made by the trust, corporation or partnership, as the case may be, to the transferor in circumstances where either

  • the payment is made before 2011, and the parties would have been willing to enter into the particular loan if they dealt at arm's length with each other, or
  • the payment is made before 2005 in accordance with fixed repayment terms agreed to before June 23, 2000.

The definition "arm's length transfer" generally applies to trust taxation years that end after 2006. However, where a trust elects, by notifying the Minister in writing on or before its filing-due date for its taxation year that includes the day on which the amending legislation introducing section 94 is assented to, the definition "arm's length transfer" will be read without reference to a loan or transfer of property that is made in a taxation year that begins before 2003 and is identified in the election. This electing provision recognizes that the definition "arm's length transfer" in the new rules does not have an equivalent under existing subsection 94(1) of the Act. In particular, a non‑resident trust considered resident under the existing law by reason of existing subsection 94(1) might not, in the absence of such an election, continue to be deemed resident under new subsection 94(3), which would result in the change in residency rules in subsection 128.1(4) applying. The election, which is found in the coming-into-force provision of the amending legislation, effectively permits a trust to elect to continue to be deemed resident.

"beneficiary"

Under paragraph (a) of the new definition "beneficiary" in subsection 94(1), a beneficiary under a trust includes a person or partnership beneficially interested in the trust. For greater certainty, where a partnership is a beneficiary under a trust, each of its partners is also a beneficiary under the trust by reason of paragraph 248(25)(c) of the Act.

Under paragraph (b) of the new definition "beneficiary", a beneficiary under a trust also includes a person that would be beneficially interested in the trust if the reference in subparagraph 248(25)(b)(ii) of the Act to

(A) "any arrangement in respect of the particular trust" were read as a reference to "any arrangement (including the terms or conditions of a share, or any arrangement in respect of a share, of the capital stock of a corporation that is beneficially interested in the particular trust) in respect of the particular trust", and

(B) "the particular person or partnership might" were read as a reference to "the particular person or partnership becomes (or could become on the exercise of any discretion by any person or partnership), directly or indirectly, entitled to any amount derived, directly or indirectly, from the income or capital of the particular trust or might".

As a result, the shareholders of a corporate beneficiary would typically be considered beneficiaries of a trust for the purposes of new sections 94 and 94.2 of the Act.

For the purposes of the Act, the expression "beneficially interested" has the meaning assigned by subsection 248(25) of the Act.

"closely-held corporation"

The definition "closely-held corporation" is relevant to the definition "restricted property" and new subsection 233.2(2) of the Act. For more information on the definition "restricted property" in subsection 94(1) and new subsection 233.2(2) of the Act, see the commentary on those provisions. Paragraph 94(15)(a) is an anti-avoidance provision that applies in determining whether a corporation is a closely‑held corporation at any time. For more detail, see the commentary on that provision.

A closely‑held corporation, at any time, means a corporation, other than a corporation in respect of which

  • there is at least one class of shares of its capital stock that includes shares prescribed for the purpose of paragraph 110(1)(d) of the Act;
  • it is reasonable to conclude that at that time, in respect of each class of shares of the corporation's capital stock that are shares prescribed for the purpose of paragraph 110(1)(d), shares of the class are held by at least 150 shareholders each of whom holds shares, of the class, that have a total fair market value of at least $500 – i.e., in general terms, the shares must be widely-held; and
  • it is reasonable to conclude that at that time, in no case does a particular shareholder (or the particular shareholder together with any other shareholders with whom the particular shareholder does not deal at arm's length) hold shares of the capital stock of the corporation
    • that would give the particular shareholder (or the particular shareholder together with those other shareholders with whom the particular shareholder does not deal at arm's length) 10% or more of the votes that could be cast under any circumstance at an annual meeting of shareholders of the corporation if the meeting were held at that time, or
    • that have a fair market value of 10% or more of the fair market value of all of the issued and outstanding shares of the corporation.

"connected contributor"

The definition "connected contributor" is relevant in determining whether a beneficiary is, at a particular time, a "resident beneficiary" (as defined in new subsection 94(1)) under a non‑resident trust. Under new paragraph 94(3)(d) of the Act, such a resident beneficiary can, to an extent, be liable for the trust's income tax. For more information, see the commentary on subsections 94(3) and (7) to (10), subparagraph 152(4)(b)(vi) and subsections 160(2.1) and (3).

A connected contributor at a particular time is any person, including a person that has ceased to exist, that is a "contributor" (as defined in new subsection 94(1)) to the trust at that time, other than

  • an individual who was resident in Canada for a period of, or periods the total of which is, not more than 60 months (but not including a trust or an individual who before that time was never non‑resident), or
  • a person all of whose contributions to the trust made at or before that time occurred at a "non‑resident time" (as defined in new subsection 94(1)) of the person.

For more information on the definitions "contributor", "resident beneficiary" and "non‑resident time" in subsection 94(1), see the commentary on those definitions.

In the context of the definition "connected contributor", reference should also be made to new paragraphs 94(2)(a), (b) and (d) to (m) (which generally extend the circumstances in which a transfer is considered to occur for the purposes of section 94), new paragraphs 94(2)(n) to (q), subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94 and may apply to deem a person or partnership to be a connected contributor to a trust), and paragraphs 94(2)(c) and (r) to (u) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94). Reference should also be made to new subsection 94(10), which applies where a contributor becomes resident in Canada within 60 months after making a contribution to a trust.

"contribution"

Where a "contribution" is made at or before a particular time to a non‑resident trust by a person or partnership, that person – or in the case of a partnership, a person that is a member of that partnership – will generally be considered to be a "contributor" at the particular time and, in certain cases (excluding, for example, electing contributors), will be jointly and severally or solidarily liable under subsection 94(3) for the trust's income taxes. For more detail on the expression "solidarily ", please refer to the introductory commentary above on new section 94. For more information on subsection 94(3), see the commentary on that subsection.

Under paragraph (a) of the definition, a "contribution" to a trust by a particular person or partnership means a loan or transfer of property (in this commentary referred to as a "transfer") by the person or partnership to the trust (other than an "arm's length transfer", as defined in new subsection 94(1)).

Under paragraphs (b) and (c) of the definition "contribution", a contribution is also considered to have been made by a particular person or partnership where

  • the particular person or partnership makes a particular transfer (other than an "arm's length transfer") as part of a series of transactions or events that includes another transfer (other than an arm's length transfer), to the trust, by another person or partnership; or
  • the particular person or partnership becomes obligated to make a particular transfer (other than a transfer that would, if it were made, be an "arm's length transfer") as part of a series of transactions or events that includes another transfer (other than an arm's length transfer), to the trust, by another person or partnership.

In these circumstances, the other transfer is considered to be a contribution to the trust by the particular person or partnership only to the extent that the other transfer can reasonably be considered to have been made in respect of the particular transfer or the particular person or partnership's obligation to make the particular transfer, as the case may be. In either case, a contribution is considered to be made at the time of the other transfer.

There are a number of rules that have the effect of expanding the application of the definition "contribution". See the commentary on new paragraphs 94(2)(a), (b) and (d) to (m) (which generally extend the circumstances in which a transfer is considered to occur for the purposes of section 94), and new paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94). See also the commentary on paragraphs 94(2)(c) and (r) to (u), which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94.

The definition "contribution" applies to all loans and transfers, irrespective of when made.

"contributor"

A "contributor" to a trust at any time means a person, other than an exempt person but including a person that has ceased to exist, that at or before that time has made a "contribution" (within the meaning assigned by subsections 94(1) and (2)) to the trust. The definition "contributor" is significant primarily for the purposes of the definitions "resident contributor" and "connected contributor" in new subsection 94(1). For more information, see the commentary on those definitions and on the definition "exempt person".

Reference should be made in this context to new paragraphs 94(2)(a), (b) and (d) to (m) (which generally extend the circumstances in which a transfer is considered to occur for the purposes of section 94), new paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94) and paragraphs 94(2)(c) and (r) to (u) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94).

Note that although a partnership is not considered to be a contributor in respect of contributions made by the partnership to a trust, persons that are members of the partnership are considered to have also made those contributions to the trust and, therefore, are contributors to the trust in respect of those contributions.

"electing contributor"

The definition "electing contributor" is relevant in applying the rules for attributing, under new subsections 94(16) and (17) of the Act, trust income to a resident contributor. An electing contributor to a trust means a resident contributor to the trust who has elected to be attributed the electing contributor's share of the trust's income. For this purpose, the trust's income is determined after taking into account allocations to beneficiaries (i.e., after deducting amounts under subsections 104(6) and (12) of the Act) and after excluding amounts in respect of property income from the non-resident portion of the trust (i.e., as provided by subparagraph 94(3)(f)(i)). For more information on the definitions "resident contributor" and "resident portion" in new subsection 94(1), see the commentary on those definitions.

In order for an election to be valid it must be made to have subsection 94(16) apply to the contributor for the taxation year in which the election is made and for all subsequent taxation years, and it must be filed with the Minister on or before the contributor's filing-due date for that first taxation year. A valid election must also include the trust's account number assigned by the Minister (i.e., the number found in box 14 of the T3 information slip and also identified as the "Trust account number" on the first page of the trust's T3 return of income), and evidence that the contributor notified the trust, no later than 30 days after the end of the trust's taxation year that ends in the first year for which the election is to have effect, that the election would be made.

For more detail on the effect of making an election to be an electing contributor, see the commentary on subsections 94(7), 94(16) and 94(17).

"exempt amount"

The expression "exempt amount" is relevant in determining whether Part XIII tax applies to a non‑resident person in respect of an amount paid or credited after 2003 by a trust to which subsection 94(3) applies. In general terms, Part XIII tax will not apply to such amounts if they are exempt amounts.

Three kinds of amounts may qualify as an exempt amount in respect of a particular taxation year of a trust. The first is any amount paid or credited (within the meaning assigned by Part XIII) by the trust before 2004.

The second is an amount that is paid or credited by the trust and referred to in paragraph 104(7.01)(b) in respect of the trust for the particular taxation year. For more detail on paragraph 104(7.01)(b), see the commentary on that provision.

The third type of exempt amount arises only in respect of trusts created before October 30, 2003 and to which no contributions have been made on or after July 18, 2005. In respect of such trusts, an exempt amount also means an amount (other than an amount included in computing an exempt amount in respect of any other taxation year of the trust) that is described in subparagraph 212(1)(c)(i) and paid in the particular taxation year (or within 60 days after the end of the particular taxation year) by the trust directly to a qualifying beneficiary under the trust. In this regard, a qualifying beneficiary means a beneficiary (determined without reference to subsection 248(25)) who is a natural person none of whose interests as a beneficiary under the trust was ever acquired for consideration (determined by reference to subsection 108(7)).

For more detail on subsection 108(7), see the commentary on that provision.

"exempt foreign trust"

An "exempt foreign trust" includes a number of different types of non‑resident trusts that are exempt from deemed Canadian residence under new subsection 94(3) of the Act. The expression refers to the following types of non‑resident trusts:

(a) a non‑resident trust the current income (determined with reference to amended subsection 108(3)) or capital from which can be provided only to one or more physically or mentally infirm dependent individuals, provided that each such individual is at all times that they are a beneficiary under the trust during the trust's current taxation year, non‑resident, and that any property settled on the trust could reasonably be considered, at the time it was settled, to be necessary for the maintenance of those individuals;

(b) a non‑resident trust created as a consequence of the breakdown of a marriage or common-law partnership of two individuals, the current income (determined with reference to amended subsection 108(3)) or capital from which can be provided only for the maintenance of non‑resident beneficiaries of the trust who, during that marriage or common-law partnership, were either

  • children of both of the individuals, if the beneficiaries are under 21 years of age (or under 31 years of age and enrolled in a specified educational institution); or
  • one of those individuals.

Under this exemption, each contribution to the trust must have been to provide for the maintenance of those children or a former spouse or common-law partner of the relationship. In the case of contributions to provide for the maintenance of a former spouse or common-law partner of the relationship, those contributions must be an amount paid that would be a "support amount" (as defined in subsection 56.1(4) of the Act) if the amount had been paid directly to the former spouse or common-law partner;

(c) a non-resident trust that is an agency of the United Nations, certain non‑resident trusts that own or administer a university described in paragraph (f) of the definition "total charitable gifts" in subsection 118.1(1) of the Act, a non-resident trust to which her Majesty in right of Canada has made a gift in the trust's current taxation year or at any time in the preceding calendar year, or a non-resident trust established pursuant to the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage, 1992, or any protocol to that Convention ratified by the Government of Canada;

(d) certain non‑resident trusts established exclusively for charitable purposes (as those purposes are defined under the laws of Canada);

(e) a non‑resident trust that is governed by an employee profit sharing plan (as defined in subsection 248(1)), by a retirement compensation arrangement (as defined in subsection 248(1)), or, by a foreign retirement arrangement (as defined in subsection 248(1));

(f) certain foreign-trusteed employee benefit plans if at all times that the trust exists, it is operated exclusively for the purposes of providing employee benefits, and throughout its current taxation year the trust

  • is governed by an employee benefit plan or described in paragraph (a.1) of the definition "trust" in subsection 108(1) of the Act,
  • is maintained for the benefit of natural persons, the majority of whom are non‑resident, and
  • provides only benefits in respect of qualifying services, as defined in subsection 94(1) (or, as provided in the enacting provision, only in respect of taxation years that end before 2009, benefits in respect of particular services rendered before November 9, 2006 to an employer by an employee if the employee had a right before November 9, 2006 to receive the benefits in respect of the particular services pursuant to a written agreement entered into before November 9, 2006, and (where the employee was resident in Canada on November 9, 2006), a copy of which was filed with a prescribed form with the Minister by or on behalf of the employer no later than April 30 of the first calendar year that begins after November 9, 2006;

(g) a non‑resident trust (other than a trust prescribed in section 4800.1 of the Regulations or a trust described in paragraph (a.1) of the definition "trust" in subsection 108(1)) that at all times since it was created has been operated exclusively for the specific purposes described below, is resident in a particular country other than Canada and has been exempt – because it is operated for these specific purposes – from paying income tax to the government of that country. The specific purposes are administering or providing superannuation or pension benefits, where those benefits are primarily in respect of services rendered in that particular country by natural persons who were non‑resident at the time the services were rendered – as a result, certain trusteed foreign pension plans or similar arrangements are intended to qualify as an exempt foreign trust under this provision;

(h) a non‑resident trust (other than a trust that files an appropriate election with the Minister not to be an exempt foreign trust for the taxation year in which the election is made and for each subsequent taxation year) whose only beneficiaries with rights to receive directly from the trust any of the income or capital of the trust are beneficiaries that hold specified fixed interests (as defined in new subsection 94(1) of the Act) in the trust and one of the following applies:

  • there are at least 150 direct beneficiaries under the trust each of whom holds specified fixed interests in the trust worth at least $500,
  • all specified fixed interests in the trust are listed on a designated stock exchange and were traded on a designated stock exchange on at least 10 days in the 30 immediately preceding days,
  • each outstanding specified fixed interest in the trust was either
    • issued by the trust for at least 90 per cent of the interest's proportionate share of the net asset value of the trust's property at the time the interest was issued, or
    • acquired for fair market value at the time the interest was issued, or
  • the trust is governed by a Roth IRA within the meaning of section 408A of the United States Internal Revenue Code or a plan or arrangement created after September 21, 2007 that the Minister agrees is substantially similar to a Roth IRA, and that is substantially subject to the Code (in this context, the reference to the Minister means the Minister of National Revenue, acting as competent authority under the authority of the Convention between Canada and the United States of America with respect to Taxes on Income and on Capital); or

(i) a non-resident trust that is a prescribed trust.

Paragraph (h) of the definition "exempt foreign trust" is intended to apply to non‑resident investment trusts that are truly commercial. Under new section 94.2, if a resident beneficiary holds, together with persons not dealing at arm's length with the resident beneficiary, 10% or more of the specified fixed interests in a trust described by paragraph (h) of the definition exempt foreign trust, the resident beneficiary is required to include in income a participating percentage of the trust's FAPI (determined as if the trust were a corporation). If section 94.2 does not apply in respect of an interest in the trust, section 94.1 may instead apply to require the beneficiary to include an amount in income. For more information on sections 94.1 and 94.2 of the Act, see the commentary on those provisions.

"exempt person"

The definition "exempt person" is relevant to the definitions "contributor" and "resident beneficiary" under new subsection 94(1) of the Act. Generally, an exempt person means a person exempt by subsection 149(1) of the Act from paying tax on their taxable income, Her Majesty in right of Canada or a province, certain federal or provincial pension or workers compensation administrators, and intermediaries wholly owned by such entities. Exempt persons are neither contributors nor resident beneficiaries under sections 94 and 94.2.

"exempt service"

The definition "exempt service" is relevant to new paragraph 94(2)(f), which deems the provision of certain services (other than exempt services) to be a transfer of property.

An exempt service means a service rendered at any time by a person or partnership (the "service provider") to, for or on behalf of, another person or partnership (a "recipient") if either

  • the recipient is at that time a trust and the service relates to the administration of the trust, or
  • the following conditions apply in respect of the service; namely

(i) the service is rendered in the service provider's capacity at that time as an employee or agent of the recipient,

(ii) in exchange for the service, the recipient transfers or loans property or becomes obligated to transfer or loan property, and

(iii) it is reasonable to conclude

(A) having regard only to the service and the exchange, that the service provider would have been willing to carry out the service if the service provider had dealt at arm's length with the recipient, and

(B) that the terms, conditions, and circumstances under which the service was provided, would have been acceptable to the service provider if the service provider had dealt at arm's length with the recipient.

An exempt service that relates to the administration of the trust is not limited to services provided by a trustee of the trust, and may include legal, accounting and similar services provided in connection with the administration of the trust. However, where legal, accounting or similar services are provided in connection with a service provided by the trust, such services would not relate to the administration of the trust.

"joint contributor"

The definition "joint contributor" is relevant in applying the rules for attributing, under new subsections 94(16) and (17) of the Act, trust income to a resident contributor where, in respect of a given contribution to the trust, there is more than one contributor. In this circumstance, a joint contributor refers to each person that made (including a person that is deemed to have made) the contribution to the trust.

For more information on contributions, see the commentary on the extended meanings of transfers, loans and contributions in new subsection 94(2), and the commentary on the definition "contribution" in subsection 94(1).

"non-resident portion"

The non-resident portion of a trust is defined by reference to the resident portion of a trust. Essentially, the non-resident portion of a trust constitutes all property held by the trust that is not part of the resident portion of the trust. Under new paragraph 94(3)(f) of the Act, a trust that is deemed to be resident in Canada for a taxation year may disregard certain amounts in computing its income for the year.

Specifically, an income or loss from property, or a taxable capital gain or allowable capital loss from a disposition of property, is generally disregarded to the extent that the property is part of its non-resident portion (an exception applies in respect of certain Canadian source amounts, which are still required to be included in the trust's income even if they relate to property in the trust's non-resident portion.)

For more information on the definition "resident portion" in new subsection 94(1) of the Act, see the commentary on that definition.

"non‑resident time"

The definition "non‑resident time" is relevant in determining whether a contributor to a trust is a "connected contributor" and whether the extended transfer ("look-through") rule in paragraph 94(2)(l) applies in determining whether a person or partnership has made a contribution to a trust.

The "non‑resident time" of a person in respect of a contribution to a trust and a particular time means a time (referred to in this commentary as the "contribution time") at which the person made a contribution to a trust, that is before the particular time and at which the person was non‑resident (or not in existence). However, such a time will qualify as a non‑resident time only if the person was non‑resident (or not in existence) throughout a specified period.

(i) General rule

In general (subject to the specific exceptions discussed below), the specified period is the period that begins 60 months before the contribution time and ends at the earlier of 60 months after the contribution time and the particular time.

The measurement of the specified period by reference to any particular time is meant to ensure that the contributing person and the trust may treat the contribution time as a non‑resident time for the purposes of applying subsection 94(3) at a specified time (as defined in subsection 94(1)) in respect of the trust for a taxation year of the trust (generally, the end of that taxation year) if at the end of that particular year the contributor still has not become resident in Canada within the 60-month period after the contribution time.

However, new subsection 94(10) ensures that such a contributor will, for the purposes of the definition "connected contributor", be considered to have made the contribution at a time other than a non‑resident time if the contributor becomes resident in Canada within the 60-month period after the contribution time. In such a case, at each such specified time in respect of the trust for a taxation year of the trust (generally, the end of each of those taxation years) following the contribution, there would be a connected contributor to the trust and, if there were a resident beneficiary under the trust, subsection 94(3) would also apply in respect of those years.

Amended subparagraph 152(4)(b)(vi) of the Act ensures that a reassessment of a taxpayer arising out of the application of subsection 94(10) may be undertaken by the CRA within 3 years after the end of the taxpayer's normal reassessment period for the taxpayer's relevant taxation year.

(ii) Contributions made on and as a consequence of death

For contributions made by an individual to a trust or estate that arose on and as a consequence of the individual's death, the specified period will start 18 months before the individual's death and will end 60 months after the contribution time. However, since the individual will not be in existence after death, those contributions will, in effect, be considered to have been made at a non-resident time provided the individual was not resident in Canada throughout the 18 month period before the individual's death.

(iii) Contributions made before June 23, 2000

As indicated in the coming-into-force provision for new section 94 of the Act, where the contribution time occurs before June 23, 2000, the specified period is the period that begins 18 months before the end of the trust's taxation year that includes the contribution time and ends at the earlier of 60 months after the contribution time and the particular time. In effect, a contribution made before June 23, 2000 will be considered to have been made by a person at a non-resident time if the person was non-resident in Canada for at least 18 consecutive months before the contribution was made, and remained non-resident for at least another 60 consecutive months after the contribution.

Example 1

Marie has never been resident in Canada. Upon her death in 2011, her property was transferred to a trust that is non-resident in Canada for the benefit of her adult children, one of whom is currently resident in Canada. No other property is contributed to the trust.

Results

1. Under paragraph 94(2)(j), the contribution is deemed to have been made immediately before Marie's death. Since Marie was not resident in Canada for the 18 months before her death and not in existence for the 60 months following her death, the contribution is considered to have been made at a non-resident time.

2. Although one of the beneficiaries is resident in Canada, that beneficiary is not a resident beneficiary for the purposes of these rules, and the trust is not deemed to be resident in Canada. If, at some time in the future, the trust is resettled or the property is otherwise transferred to a new trust, Marie will be deemed to be a contributor to the new trust by reason of new paragraph 94(2)(n). However, since Marie will either have been non-resident or not in existence for the 60 months before and after that transfer to the new trust, Marie's deemed contribution will be made at a non-resident time. The new trust will not be deemed resident even if one or more of the beneficiaries are resident in Canada at that time.

For more information on new subsection 94(10) and amended subparagraph 152(4)(b)(vi), see the commentary on those provisions.

"promoter"

The definition "promoter" is relevant in applying new paragraph 94(2)(s), which provides that a transfer to a trust will not be considered a contribution where certain conditions, described in that paragraph, are met. For this purpose a promoter means a person or partnership that establishes, organizes or substantially reorganizes the undertakings of the trust. For more information on paragraph 94(2)(s), see the commentary on that paragraph.

"qualifying services"

The definition "qualifying services" is relevant in applying paragraph (f) of the definition "exempt foreign trust" in subsection 94(1).

In general terms, "qualifying services" are

  • services rendered by an employee of an employer while the employee was non resident,
  • services rendered to an employer other than services that were rendered primarily in Canada, services rendered in connection with a business carried on by an employer in Canada, or a combination of these services,
  • services rendered in a particular calendar month by an employee of the employer which employee
    • was resident in Canada no more than 60 months during the 72 month period that ends at the end of the particular month, and
    • became a member of, or a beneficiary under the plan or trust under which benefits in respect of the services may be provided (or a similar plan or trust for which the plan or the trust was substituted) before the end of the calendar month following the month in which the employee became resident in Canada, or
  •  any combination of services that are qualifying services described above.

 For more detail on paragraph (f) of the definition "exempt foreign trust" in subsection 94(1), see the commentary on that definition.

"resident beneficiary"

Under new subsection 94(3), a particular trust is generally treated as resident in Canada for a particular taxation year of the trust if there is a "resident beneficiary" under the particular trust at a "specified time" (generally, the end of the particular year). Under new paragraph 94(3)(d), each resident beneficiary can be jointly and severally or solidarily liable with the particular trust for the particular trust's income tax liabilities under the Act for the particular year. For further information with respect to the expression "solidarily ", please refer to the introductory commentary on new section 94. See also the commentary on new subsection 94(3).

A resident beneficiary at a particular time under a trust is a person (other than a person that is at that time an "exempt person" or a "successor beneficiary" in respect of the trust) that, at that time, is a beneficiary under the trust, if, at that time,

  • the person is resident in Canada; and
  • there is a "connected contributor" to the trust.

The expressions "connected contributor", "exempt person", "specified time" and "successor beneficiary" are defined in new subsection 94(1). For further information, see the commentary on those definitions.

"resident contributor"

Under new subsection 94(3), a trust is generally treated as resident in Canada for a particular taxation year of the trust if there is a "resident contributor" to the trust at a "specified time" in respect of the trust for the particular taxation year (generally, the end of the particular year). Under new paragraph 94(3)(d), a "resident contributor" to a trust, other than an electing contributor to the trust, can be jointly and severally or solidarily liable with the trust for the trust's income tax liabilities under the Act for the particular year. For further information with respect to the expression "solidarily", please refer to the introductory commentary above on new section 94.

A "resident contributor" to a trust at any time means a person that is, at that time, resident in Canada and a "contributor" (as defined in new subsection 94(1)) to the trust. However, an exemption from treatment as a resident contributor is provided for a contributor who is:

  • an individual who has been resident in Canada for a period of, or periods the total of which is, not more than 60 months (but not including an individual who before that time was never non-resident); and
  • an individual, if the trust is an inter vivos trust that was created before 1960 by a person who was non-resident when the trust was created and the individual made no contribution after 1959 to the trust.

In the context of this definition, reference should also be made to new paragraphs 94(2)(a), (b) and (d) to (m) (which extend the circumstances in which a transfer is considered to occur for the purposes of section 94), new paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94) and paragraphs 94(2)(c) and (r) to (u) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94).

"resident portion"

The expression "resident portion" is relevant to determining which property of a trust will be considered in determining the Canadian income tax consequences to a trust that is deemed by subsection 94(3) of the Act to be resident in Canada for a taxation year. In general, contributions of property to the trust will form part of the resident portion of the trust to the extent that they were made by current or former residents of Canada.

More specifically, paragraph (a) of the definition provides that all property held by the trust in respect of which a contribution has been made by a "connected contributor" or a "resident contributor" will be a part of the resident portion of the trust. Therefore, if a contribution of property is made jointly by a resident contributor and a non-resident contributor (whether in fact, or by reason of a deeming provision), the property will form part of the resident portion. However, an exception is provided for property held in common or in partnership and that is contributed by one or more connected or resident contributors and one or more persons who are not connected or resident contributors. In such a case, the property will form part of the resident portion of the trust only to the extent of the contributions by connected or resident contributors. This exception contemplates that a particular property be notionally divided, such that part of the property will form part of the resident portion and part of the property will form part of the non-resident portion of the trust, according to the extent to which contributions were made by connected contributors and resident contributors to the trust and by persons who are not connected or resident contributors to the trust in respect of the property. 

When a non-resident makes a contribution within 60 months of becoming resident in Canada, the contribution will form part of the resident portion as of the date of the contribution by operation of subsection 94(10). For more information on the effect of 94(10) on electing contributors, see the commentary on subsection 94(16).

Paragraph (b) of the definition provides a rule to apportion a specified property, or property substituted for it, a part of which would not otherwise be part of the resident portion of the trust, in respect of which the trust has incurred indebtedness (e.g., by way of a loan, or the unpaid portion of the purchase price) in order to fund its acquisition. If the acquisition of the specified property is not a contribution to the trust, paragraph (b) applies a formula to allocate a part of the specified property to the resident portion of the trust to the extent of the greater of

  • the fair market value of the specified property multiplied by the proportion that the total fair market value of all property held in the resident portion of the trust at the beginning of the trust's taxation year in which the trust acquired the specified property is of the total fair market value of all property held by the trust at the beginning of the trust's taxation year in which the trust acquired the specified property; and
  • the amount determined by the computation directly above if references to the beginning of the trust's taxation year were read as the end of the trust's taxation year, and if the specified property was not held by the trust at the end of that taxation year.

Paragraph (b) therefore has the effect of allocating the specified property between the resident portion and the non-resident portion on a reasonable basis, accounting for additional contributions to the trust made in the year.

Paragraph (c) provides that the resident portion of the trust will also include property to the extent that it is substituted for property described in paragraphs (a) and (b) of the definition. In this context, paragraph (c) is informed by the meaning of "substituted property" under subsection 248(5) of the Act such that property substituted for substituted property within the meaning of paragraph (c) will also form part of the resident portion of the trust.

Paragraph (d) of the definition includes in the resident portion of the trust property that is not described by any of paragraphs (a) to (c) of the definition to the extent that it is derived, directly or indirectly in any manner whatever, from property described in those paragraphs. Under paragraph (d), such property would include, but not be limited to, income accumulating in the trust and income earned on such accumulating income, capital gains (i.e., the tax-free portion of a capital gain), and insurance proceeds in respect of which the insurance premiums were funded in whole in part by property from the resident portion of the trust.

For more information on the definitions "connected contributor", "resident contributor" and "non-resident portion" in new subsection 94(1), see the commentary on those definitions.

Example 1

1. Cathy, who has never been resident in Canada, settled a non-resident trust in 2004 for the benefit of her daughter, Mary, and Mary's family (all of whom are resident in Canada), by making a contribution of $100,000 to the trust. The trust used $50,000 of this amount to acquire a guaranteed investment certificate issued by a financial institution that is not resident in Canada and provides a 6% annual return on investment (with simple interest), and used the remaining $50,000 to acquire shares in a public corporation, Corporation A. The $3,000 earned annually on the guaranteed investment certificate is used by the trust to pay, on an annual basis, $3,000 in investment counsel fees that meet the conditions set out in paragraph 20(1)(bb) of the Act. At the end of 2009, the total fair market value of all of the trust's assets is $200,000 (comprised of the guaranteed investment certificate valued at $50,000 and shares of Corporation A valued at $150,000).

2. On May 15, 2010, Mary made a contribution of $200,000 to the trust which was deposited in an interest-bearing foreign bank account that earns $20,000 in 2010 and each following year as simple interest, payable at the end of each year. As a result, the trust's income for 2010 is $23,000 ($3,000 in interest from the guaranteed investment certificate and $20,000 in interest from the foreign bank account, none of which is derived from a source in Canada). As such, none of the trust's investments is derived from sources in Canada. At the end of 2010, the total fair market value of all of the trust's assets is $420,000 (comprised of the guaranteed investment certificate valued at $50,000, $220,000 held on deposit, and the shares of Corporation A valued at $150,000).

3. On May 15, 2011, the trust disposes of all its shares of Corporation A for $250,000 and invests the proceeds in shares of another corporation, Corporation B (the fair market value of which, at December 31, 2011, is $250,000). At the end of 2011, the total fair market value of all of the trust's assets is $540,000 (comprised of the guaranteed investment certificate valued at $50,000, $240,000 held on deposit, and the shares of Corporation B valued at $250,000).

4. On May 15, 2012, the trust borrows $100,000 from a bank. The trust uses the proceeds of the loan to acquire shares of another public corporation, Corporation C, the fair market value of which, at December 31, 2012, is $100,000.  The trust also earns in 2012 another $20,000 on the amount held on deposit in the interest-bearing account and another $3,000 in interest on the guaranteed investment certificate which it uses to pay the investment counsel fees of an equal amount. At the end of 2012, the total fair market value of all of the trust's assets is $660,000 (comprised of the guaranteed investment certificate valued at $50,000, $260,000 held on deposit, the shares of Corporation B valued at $250,000 and the shares of Corporation C valued at $100,000).

5. Although the trust is resident in Country X, it is not required to pay any income tax to Country X. In addition, since Mary elects to be an electing contributor, the trust is not required to pay any Canadian income tax.

6. At no time has the trust has made a distribution to its beneficiaries.

Results

2004-2009

1. The trust is not deemed to be resident in Canada under new subsection 94(3) of the Act for any of its 2004 to 2009 taxation years.

2010

2. The trust is deemed to be resident in Canada under subsection 94(3) for its 2010 taxation year because Mary is a resident contributor to, and a resident beneficiary under, the trust at the end of that year. Since the trust is deemed resident for its 2010 taxation year (and not the immediately preceding year), new paragraph 94(3)(c) of the Act deems the trust to have disposed of its shares in Corporation A immediately before its 2010 taxation year such that the adjusted cost base of those shares at the end of 2009 is $150,000. In computing the trust's income for 2010 for Canadian tax purposes, the amount of the trust's income from its "non-resident portion" is excluded and the deduction under paragraph 20(1)(bb) is limited to the portion of the investment counsel fees that relates to its "resident portion" (both terms as defined in new subsection 94(1) of the Act). At the end of the trust's 2010 taxation year, its resident portion is comprised of the $200,000 contribution by Mary. The balance of its property (the $100,000 contributed by Cathy and the accumulated capital of $100,000) is included in its non-resident portion. These amounts do not include amounts in respect of the interest income earned by the trust in 2010. As a result, the trust may exclude 200,000/400,000 of its gross income ($23,000) as computed for Canadian tax purposes. In addition, the amount deductible under paragraph 20(1)(bb) is limited to the portion that relates to the resident portion, or 200,000/400,000 of $3,000, such that its income for its 2010 taxation year for Canadian tax purposes is $10,000 (200,000/400,000 x $23,000 – 200,000/400,000 x $3,000). Therefore, of the $20,000 of net accumulated income earned by the trust during 2010, $10,000 is included in its resident portion for its 2010 taxation year by reason of paragraph (d) of the definition "resident portion". The remaining $10,000 is included in its "non-resident portion".

2011

3. In 2011 the trust earns $23,000 in gross interest income and realizes a capital gain on the disposition of the shares of Corporation A in respect of its resident portion. The amount of the trust's capital gain on the Corporation A shares before determining what portion of the shares relates to its resident portion and non-resident portion is $100,000 ( $250,000 - $150,000).

The portion of the Corporation A shares that relates to the trust's resident portion is reflected by the proportion that the property in the resident portion of the trust is of all property held by the trust. At the time immediately before the disposition, the resident portion of the trust is $210,000 (comprised of the original $200,000 resident contribution and the $10,000 included at the end of 2010). The total amount of the trust's property, immediately before the disposition, is $420,000. Accordingly, of the $100,000 of the capital gain earned by the trust, $50,000 (210,000/420,000 x $100,000) is included in its resident portion for its 2011 taxation year by reason of paragraph (d) of the definition "resident portion".

Similarly, of the $20,000 net interest income, $10,000 will be included in the trust's resident portion.

At the end of the trust's 2011 taxation year, the trust's resident portion will equal $270,000 (comprised of the original $200,000 contribution by Mary, the $10,000 included at the end of 2010, the $50,000 included of the capital gain realized in 2011 and the $10,000 included at the end of 2011).

2012

4. Under paragraph (b) of the definition "resident portion", the portion of the property (the Corporation C shares) acquired by way of the loan from the bank included in the resident portion of the trust is the greater of two amounts. The first is determined by the formula

A/B x C

where

A is $270,000, the fair market value of each property that forms part of the resident portion of the trust at the beginning of the trust's 2012 taxation year,

B is $540,000, the fair market value of all property of the trust held at the beginning of its 2012 taxation year, and

C     is $100,000, the fair market value of the property acquired with the proceeds of the loan from the bank.

The second amount is determined by the formula

A/B x C

where

A is $280,000, the fair market value of each property that forms part of the resident portion of the trust at the end of its 2012 taxation year (including the amount included in respect of the net interest income of the trust) computed without reference to the property (shares in Corporation C) acquired by the trust during it's 2011 taxation year

B is $560,000, the fair market value of all property of the trust held at the end of its 2011 taxation year computed without reference to the property acquired by the trust during it's 2012 taxation year, and

C is $100,000, the fair market value of the property acquired with the proceeds of the loan from the bank.

In this example, both amounts as determined by the formula are $50,000, which is the expected result when a trust has received no additional contributions from a contributor in a taxation year. As a result $50,000 of the value of the Corporation C shares is included in the resident portion and $50,000 of their value is included in the non-resident portion. Thus, of the trust's property for its 2012 taxation year, which is comprised of $660,000, the resident portion has a value of $330,000 and the non-resident portion has a value of $330,000. As a result, the income (taxable under Part I of Act) from the trust's resident portion for its 2012 taxation year is $10,000 (($23,000 – 3,000) x ($320,000/640,000)).

5. The resident portion and non-resident portion at the beginning of 2013 are therefore comprised of the following:

  Resident portion ($) Non-resident portion ($)
Contributions – 2010 200,000 200,000
Accumulated Income – 2010 10,000 10,000
 

Totals – end of 2010 taxation year 210,000 210,000
Accumulated Income – 2011 60,000 (50,000 capital gain and 10,000 interest) 60,000 (50,000 capital gain and 10,000 interest)
Totals – end of 2011 taxation year 270,000 270,000
Contribution (bank loan) – 2011 50,000 50,000
Accumulated Income – 2011 10,000 10,000
 

Totals – end of 2011 taxation year 330,000 330,000

"restricted property"

The expression "restricted property" is relevant in applying a number of provisions in respect of non‑resident trusts, including the definitions "arm's length transfer" and "exempt foreign trust" in new subsection 94(1) of the Act. The definition "restricted property" is intended to serve as an anti-avoidance provision.

Specifically, restricted property of a person or partnership means property held by the person or partnership that is

  • under paragraph (a) of the definition, a share (or a right to acquire a share) of the capital stock of a closely-held corporation if the share (or right), or a property for which the share (or right) was substituted, was at any time acquired as part of a transaction or series of transactions under which either
      • a specified share of the capital stock of a closely-held corporation was acquired by any person or partnership in exchange for, as consideration for, or upon conversion of any property at a cost less than the fair market value of the specified share at the time of its acquisition,
      • or a share (other than a specified share) of the capital stock of a closely-held corporation that was not a specified share becomes a specified share;
  • under paragraph (b) of the definition, an indebtedness or other obligation (or a right to acquire an indebtedness or other obligation) of a closely-held corporation if
    • the indebtedness, obligation or right, or a property substituted for it, was acquired as part of a transaction or series of transactions under which either
      • a specified share of the capital stock of a closely-held corporation was acquired by any person or partnership in exchange for, as consideration for, or upon conversion of any property at a cost less than the fair market value of the specified share at the time of its acquisition, or
      •  a share (other than a specified share) of a closely-held corporation that was not a specified share becomes a specified share, and
    •  the amount of any payment under the indebtedness, obligation or right (whether immediate or future, absolute or contingent or conditional on or subject to the exercise of any discretion by any person or partnership) is, directly or indirectly, determined primarily by reference to one or more of
      •  the fair market value of, production from or use of any of the property of the closely-held corporation,
      •  gains or profits from the disposition of any of the closely-held corporation's property,
      •  income, profits, revenue or cash flow of the closely-held corporation, or
      •  any criterion similar to those listed immediately above; and
    • under paragraph (c) of the definition, any property that was acquired by the person or partnership as part of a series of transactions described in paragraph (a) or (b) of the definition, and the fair market value of which is derived in whole or in part, directly or indirectly, from a particular share, indebtedness or right described in paragraph (a) or (b) of the definition.

 New subsection 94(14) may apply in some circumstances to suspend a property's characterization as restricted property. For more details, see the commentary on that provision.

"specified fixed interest"

The expression "specified fixed interest" is relevant in applying paragraphs 94(2)(q) and (r), paragraph (h) of the definition "exempt foreign trust" in subsection 94(1), the anti-avoidance provisions in new subsection 94(15), and new section 94.2 of the Act. These provisions are intended to apply only to commercial trusts and, in the case of paragraph 94(15)(b), employee benefit trusts that satisfy the criteria found in paragraph (f) of the definition "exempt foreign trust".

A specified fixed interest at any time of a person or partnership in a trust means an interest of the person or partnership as a beneficiary under the trust (determined without reference to subsection 248(25) of the Act) if none of the income or capital of the trust to be distributed in respect of any interest in the trust depends on the exercise, or the failure to exercise, by any person or partnership of any discretionary power. In the context of a commercial trust in which discretion with respect to the timing of distributions does not change the rights to income and capital in respect of any of the interests in the trust, such timing discretion will not disqualify the interests in the trust as specified fixed interests. This is so even if a beneficiary (the "seller") were to sell their interest to another beneficiary (the "purchaser"), such that an amount that would have been payable to the seller is instead paid to purchaser (the seller would presumably have been compensated for this in determining the proceeds of disposition of the interest). However, if the discretion with respect to the timing of distributions is such that the trustee may choose which beneficiary would be entitled to a particular distribution (i.e., where payments made before a specific date would be payable to one beneficiary and payments made after that date would be payable to another beneficiary), the beneficial interests in the trust would not be specified fixed interests. For greater certainty, beneficial interests in a trust the terms of which provide a person or partnership with a power to appoint new beneficiaries or to vary the beneficial interests in the trust would not be specified fixed interests.

"specified party"

New subsection 94(8) of the Act provides a rule for calculating a person's recovery limit for the purpose of determining under subsection 94(7) of the Act the extent of the person's limitation on liability arising under a provision referred to in new paragraph 94(3)(d). A "specified party" in respect of a particular person at any time means:

  • under paragraph (a) of the definition, a spouse or common-law partner of the particular person;
  • under paragraph (b) of the definition, a corporation that is a "controlled foreign affiliate" of the particular person or their spouse or common-law partner, or a corporation that would be a controlled foreign affiliate of a partnership, of which the particular person is a majority interest partner, if the partnership were a person resident in Canada at that time;
  • under paragraph (c) of the definition, a person, or partnership of which the particular person is a majority interest partner, for which it is reasonable to conclude that a benefit referred to in subparagraph 94(8)(a)(iv) of the Act (i.e., a benefit received or enjoyed under a trust) was conferred either
    • in contemplation of the person becoming after that time a corporation described by paragraph (b) of the definition, or
    • to avoid or minimize a liability that arose, or that would otherwise have arisen, under Part I of the Act with respect to the particular person; or
  • under paragraph (d) of the definition, a corporation in which the particular person, or a partnership of which the particular person is a majority interest partner, is a shareholder, if the corporation is or was a beneficiary under a trust, and the particular person or partnership is a beneficiary under the trust solely because of the application of paragraph (b) of the definition "beneficiary" in new subsection 94(1) to the particular person or the partnership in respect of the corporation.

 "specified share"

A specified share means a share of the capital stock of a corporation other than a share that is prescribed for the purpose of paragraph 110(1)(d) of the Act. This expression is relevant to the definition "restricted property" in subsection 94(1). For more information, see the commentary on the definition "restricted property".

"specified time"

A specified time, in respect of a trust for a taxation year of the trust, means

  • if the trust exists at the end of the taxation year, the time that is the end of that taxation year; and
  • if the trust ceases to exist after October 30, 2003, the time in that taxation year that is immediately before the time at which the trust ceases to exist.

This definition is relevant in determining whether paragraph 94(3)(a) applies to deem the trust to be resident in Canada, for the taxation year, for a number of purposes. It also applies in respect of subsections 94(7), (10) and (15) to (17). For more detail, see the commentary on those provisions.

"successor beneficiary"

The expression "successor beneficiary" is used in the definition "resident beneficiary" in new subsection 94(1). A resident beneficiary under a trust does not include a successor beneficiary.

A successor beneficiary under a trust at a particular time means a person that is a beneficiary under the trust solely because of a right of the person to receive any of the trust's income or capital, if under that right the person may so receive that income or capital only on or after the death after that time of a specified individual. For this purpose a specified individual is an individual who is, at that time, alive and is a contributor to the trust, or is related to (including an aunt, uncle, niece or nephew of) a contributor to the trust or who would be so related if every individual who was alive before that time were alive at that time.

For more information on the definition "resident beneficiary" in new subsection 94(1) of the Act, see the commentary on that definition.

"transaction"

 A definition "transaction" is provided for the purpose of applying section 94. The definition clarifies that a reference to a transaction in that section includes an arrangement or event.

"trust"

 A definition "trust" is provided for the purpose of applying section 94. The definition clarifies that a reference to a trust in that section includes an estate.

Rules of Application

ITA
94(2)

New subsection 94(2) of the Act sets out a number of rules for use in applying section 94. These rules are primarily relevant for the purposes of determining whether a transaction constitutes a "contribution" of property to a trust. These rules are also relevant for the purposes of subsections 94(7) to (10) and (15) to (17) and the reporting penalty provisions in subsections 162(10.1) and 163(2.4) and section 233.2.

Paragraphs 94(2)(a) to (m), with the exception of paragraph 94(2)(c), include rules that deem certain loans or transfers, the granting of options and the provision of services to be transfers of property to a person or partnership. A deemed transfer will be considered to be a contribution to a trust if the transfer falls within the criteria of the definition "contribution" in subsection 94(1) or the deemed contribution rules. In this regard, it should be noted that a transfer or loan, unless it is deemed to be a contribution under a provision of section 94, will not be considered a contribution if it is an "arm's length transfer" (as defined in new subsection 94(1)). In addition, paragraphs 94(2)(c) and (r) to (u) may apply to deem certain transfers not to be contributions.

The rules in subsection 94(2) generally apply to taxation years of trusts that end after 2006, but in some cases relief is provided with regard to transactions or events that occur before June 23, 2000, October 11, 2002 or ANNOUNCEMENT DATE. The rules in subsection 94(2) will also apply to taxation years of trusts that end after 2000 and before 2007 if the trust was created in one of those years, and if the trust elects (under the coming-into-force provision for new section 94 of the Act) to have new section 94 of the Act apply to each of those years.

Deemed Transfers

Paragraph 94(2)(a) of the Act generally applies to indirect loans or transfers of property to a trust through transfers to other entities. Paragraph (a) deems a transfer of property (other than an "arm's length transfer", as defined in new subsection 94(1)) to be a direct transfer to a trust if the property is transferred from one person or partnership to another and, as a result of the transfer, the fair market value of the property of the trust increases or the liabilities of the trust decrease.

Where paragraph (a) applies, paragraph 94(2)(b) deems the fair market value of property deemed transferred under paragraph (a) to be the total of all amounts each of which is the absolute value of an increase in the fair market value of the trust property or a decrease in the liabilities of the trust because of the transfer. In the event that the deemed transfer is a contribution to a trust, paragraph 94(2)(p), described in greater detailed below, would deem the amount of the contribution to be that fair market value. In addition, if the time of the deemed transfer of property under paragraph (a) is after ANNOUNCMENT DATE, and the property that the person or partnership actually transferred or loaned is restricted property of the person or partnership, paragraph 94(2)(b) deems the property deemed transferred under paragraph (a) to be restricted property of the trust.

Paragraph 94(2)(d) of the Act applies when a particular person or partnership becomes obligated (e.g., by way of providing a guarantee) to effect any undertaking given to ensure repayment, wholly or partially, of a loan or other indebtedness incurred by another person or partnership, or when the particular person or partnership has provided any other financial assistance to another person or partnership. If these conditions are satisfied, the particular person or partnership is deemed to have transferred property at that time to the other person or partnership. Any property transferred (i.e., consideration paid such as a guarantee fee) to the particular person or partnership from the other person or partnership in exchange for the undertaking or other financial assistance is deemed to have been so transferred in exchange for the property deemed to be transferred to the other person or partnership.

Under paragraph 94(2)(e) of the Act, the fair market value of property deemed under subparagraph 94(2)(d)(i) to have been transferred is deemed to be equal to the amount of the loan or indebtedness incurred by the other person or partnership to which the property relates. For example, where a particular person provides a guarantee in respect of a $1,000 indebtedness entered into by another person, the particular person is deemed to have transferred at the time the guarantee is made to the other person property with a fair market value of $1,000. In the event that the deemed transfer is a contribution to a trust, paragraph 94(2)(p), described in greater detailed below, would deem the amount of the contribution to be $1,000.

Paragraph 94(2)(f) applies where any service (other than an exempt service, as defined in subsection 94(1)) is rendered after June 22, 2000 by a person or partnership to, for or on behalf of another person or partnership. In these circumstances, the person or partnership rendering the service is deemed to have transferred property to the other person or partnership. Any property given to the particular person or partnership by the other person or partnership in exchange for the service is deemed to have been transferred to the particular person or partnership in exchange for the property deemed by subparagraph (f)(i) to have been transferred. For more information on the definition "exempt service", see the commentary on that definition. Under paragraph 94(2)(h), the fair market value of the property deemed under subparagraph 94(2)(f)(i) to have been transferred is deemed to be equal to the fair market value of the services rendered. In the event that the deemed transfer is a contribution to a trust, paragraph 94(2)(p), described in greater detailed below, would deem the amount of the contribution to be that fair market value.

For greater certainty, paragraph 94(2)(g) provides that a corporation is considered to transfer shares that it issues. Similar rules, also contained in paragraph 94(2)(g), apply to interests in a trust acquired otherwise than from a beneficiary under the trust and interests in a partnership acquired otherwise than from a member of the partnership, as well as to debt issued to a person or partnership by another person or partnership and a right (granted after June 22, 2000 by the person or partnership from which the right was acquired) to acquire or to be loaned property.

Paragraph 94(2)(i) deems a person or partnership to have become obligated at a particular time to transfer property to another person or partnership where the person or partnership becomes obligated to do an act (e.g., the rendering of a service) that would constitute the transfer of a property to another person or partnership if the act were to occur.

Paragraph 94(2)(j) applies, for the purpose of applying at any time the definition "non‑resident time" in subsection 94(1), if a trust acquires property of an individual as a consequence of the death of the individual. In these circumstances, paragraph 94(2)(j) deems the individual to have transferred the property to the trust immediately before the individual's death.

Paragraph 94(2)(k) applies where a particular person or partnership loans or transfers property to another person or partnership at the direction of or with the acquiescence of a third person or partnership (the "specified person"). In these circumstances, if it is reasonable to conclude that one of the reasons for the transfer is to avoid or minimize a liability of any person or partnership under Part I of the Act that arose, or that would otherwise have arisen, because of the application of section 94, the transfer is deemed to be a transfer made jointly by the particular person or partnership and the specified person.

Paragraph 94(2)(k.1) applies where a particular person or partnership loans or transfers property to another person or partnership, at any time after November 8, 2006 and at the direction of or with the acquiescence of a third person or partnership (the "specified person"). In these circumstances, if it is reasonable to conclude that one of the reasons for the loan or transfer is to provide benefits in respect of services rendered by a person as an employee of the specified entity, the transfer is deemed to be a transfer made jointly by the particular person or partnership and the specified person.

Paragraph 94(2)(l) applies where a corporation loans or transfers property to a person or partnership at the direction of or with the acquiescence of another person or partnership (the "specified person"). In these circumstances, the transfer is deemed to be a transfer made jointly by the corporation and the specified person if

  • the transfer or loan is made at a time that is not, or would not be, if the transfer or loan were a contribution of the specified person, a "non-resident time" (as defined in new subsection 94(1)) of the specified person, or if the specified person is a partnership, a non-resident time of one or more members of the partnership, and
  • either
    • the corporation is at the time of the transfer or loan a controlled foreign affiliate of the specified person (or would be a controlled foreign affiliate of the specified person if the specified person were resident in Canada), or
    • it is reasonable to conclude that the transfer or loan was made in contemplation of the corporation becoming after the time of the transfer or loan a controlled foreign affiliate of the specified person (or a controlled foreign affiliate of the specified person if the specified person were resident in Canada).

The expression "controlled foreign affiliate" is defined in subsection 248(1) of the Act as having the meaning given in subsection 95(1).

The examples below illustrate the operation of a number of the provisions in subsection 94(2) and the definition "contribution" in subsection 94(1).

Example 1

Donald is a long-term resident of Canada. In 2011, Donald pays higher than fair market value consideration for a property acquired from a corporation. A non‑resident trust holds shares in the corporation. The fair market value of those shares increases because of the transaction.

Results

1. Under paragraph 94(2)(a), Donald is considered to have transferred property to the trust in these circumstances. The exception for arm's length transfers does not apply.

2. As a consequence, Donald is considered to have made a contribution to the trust, which results in Donald being a contributor and a resident contributor to the trust

Example 2

3. Lucie, a long-term resident of Canada, transfers property to Canco on condition that Canco direct Canco's wholly-owned foreign subsidiary (Foreignco-1) to transfer properties to another corporation (Foreignco-2) for consideration that is less than fair market value.

4. Shares of the capital stock of Foreignco-2 are held by a non‑resident trust.

5. The fair market value of the Foreignco-2 shares increases as a result of the increase in the fair market value of the property owned by Foreignco-2.

Results

1. The transfers to Canco and to Foreignco-2 are part of the same series of transactions.

2. Because of paragraph 94(2)(a), the transfer to Foreignco-2 is considered to be a transfer by Foreignco-1 to the trust. Because of paragraph 94(2)(l), the transfer by Foreignco-1 to the trust is considered to be jointly made by Foreignco-1 and Canco. This would also be the result under paragraph 94(2)(k), if it was intended to avoid or minimize a liability under Part I. The exception for arm's length transfers does not apply.

3. Canco is considered to have made a contribution to the non‑resident trust because of paragraph (a) of the definition "contribution" in new subsection 94(1). Lucie is considered to have made a contribution to the trust under paragraph (b) of that definition. Both Lucie and Canco are therefore contributors and resident contributors to the trust.

4. Foreignco-1 is also a "contributor" to the trust, but is not a "resident contributor" as long as it does not become resident in Canada.

Paragraph 94(2)(m) deems a particular person or partnership to have transferred, at a particular time, a particular property or particular part of it, as the case may be, to a corporation or a second person or partnership (described below) if

  • the particular property is a share of the capital stock of a corporation held at the particular time by the particular person or partnership, and as consideration for the disposition at or before the particular time of the share, the particular person or partnership received at the particular time (or became entitled at the particular time to receive) from the corporation a share of the capital stock of the corporation, or
  • the particular property (or property for which the particular property is substituted property) was acquired, before the particular time, from the second person or partnership by any person or partnership, in circumstances that are described by any of subparagraphs 94(2)(g)(i) to (v) (generally, the issuance by the second person or partnership of a financial instrument) and at the particular time,
    • the terms or conditions of the particular property change,
    • the second person or partnership redeems, acquires or cancels the particular property or the particular part of it,
    • where the particular property is a debt owing by the second person or partnership, the debt or the particular part of it is settled or cancelled, or
    • where the particular property is a right to acquire or to be loaned property, the particular person or partnership exercises the right.

Deemed Contributions

Paragraph 94(2)(n) applies where a particular trust makes a contribution to another trust. If this is the case, the contribution is deemed to have been made jointly by the particular trust and each other person or partnership that is a contributor to the particular trust.

Paragraph 94(2)(o) applies where a partnership makes a contribution to a trust. Where this is the case, the contribution is deemed to have been made jointly by the contributing partnership and by each person or partnership that is a member of the contributing partnership at the time of the contribution. For transfers made before ANNOUNCEMENT DATE by a partnership, a limited partner is not treated by paragraph 94(2)(o) as having made the transfer; however, if before that date a partnership has contributed to a trust, a limited partner of the partnership may also be considered to have made a contribution to the trust in respect of a transfer or loan made by the limited partner or another entity if any of the other rules in subsection 94(2) so provides.

Paragraph 94(2)(p) provides, subject to paragraphs 94(2)(q) and subsection 94(9), that the amount of a contribution to a trust at the time it was made is deemed to be the fair market value at that time of the property that was the subject of the contribution. This rule is useful for the purposes of new subsections 94(7) and (8) and (15) to (17), as well as the reporting penalty provisions in amended subsections 162(10.1) and 163(2.4). The rule is relevant because a contribution is defined by reference to a loan or transfer, rather than by reference to the property that was the subject of the loan or transfer.

Paragraphs 94(2)(q) and (r) apply to dealings in a "specified fixed interest" (as defined in new subsection 94(1)) in a trust and in a right, issued by the trust, to acquire such an interest. The rules for specified fixed interests apply in respect of commercial trusts. For more detail, see the commentary on the definition "specified fixed interest" and on paragraph (h) of the definition "exempt foreign trust" in new subsection 94(1) of the Act.  Paragraph 94(2)(q) deems a person or partnership, that at any time acquires a specified fixed interest in a trust (or a right, issued by the trust, to acquire such an interest) from another person or partnership (other than the trust), to have made a contribution to the trust at that time. The amount of the contribution is deemed to be the fair market value at that time of the specified fixed interest.

Transfers Deemed not to be Contributions

Paragraph 94(2)(c) of the Act provides an exception, from what would otherwise be a contribution to a trust, for a specified financial institution, as defined in subsection 248(1) of the Act, that makes a loan to the trust. It provides that if the loan is made on arm's length terms and in the ordinary course of business of the specified financial institution, the loan will be deemed not to be a contribution to the trust.

Paragraph 94(2)(r) generally applies where a particular person or partnership has made a contribution (e.g., because of paragraph 94(2)(q)) to a trust because of acquiring a specified fixed interest in the trust or a right to acquire such an interest, or has acquired a specified fixed interest in a trust as a consequence of making a contribution to the trust, and at a later time the interest or right, as the case may be, is transferred, for arm's length consideration, to another person or partnership (i.e., upon a sale of the interest or right, or if the other person or partnership is the trust that issued the interest or right, upon a redemption of the interest or right). In these circumstances, the particular person or partnership is deemed, for the purpose of applying section 94 at any time after the later time, not to have made the contribution described above in respect of the specified fixed interest, or right, that is the subject of the sale. However, nothing in this provision would cause any other contribution to the trust by the particular person to cease to be a contribution to the trust.

Paragraph 94(2)(s), in very general terms, provides that a transfer of property to a trust by a particular person or partnership that is a manager or promoter of the trust, in exchange for an interest as a beneficiary under the trust, will not be considered a contribution of the particular person or partnership to the trust while the beneficial interest is acquired and held by the particular person or partnership because of a requirement imposed under securities laws. Paragraph 94(2)(s) will be relevant in the relatively rare circumstance (i.e., because of an election by the trust under paragraph (h) of the definition "exempt foreign trust" not to have that paragraph apply to it) that a commercial trust cannot rely on the exemption for exempt foreign trusts in order to avoid the application of subsection 94(3). Paragraph 94(2)(s) will apply in determining under that subsection whether the trust has a resident contributor or connected contributor (i.e., and hence, a resident beneficiary).

More specifically, under paragraph 94(2)(s), a transfer to a trust by a particular person or partnership is deemed not to be, at a particular time, a contribution to the trust if

  • the particular person or partnership has transferred, at or before the particular time and in the ordinary course of business of the particular person or partnership, property to the trust,
  • the transfer is not an arm's length transfer, but would be an arm's length transfer if the definition "arm's length transfer" in subsection 94(1) were read without reference to paragraph (a), and subparagraphs (b)(i), (ii) and (iv) to (vii) of that definition,
  • it is reasonable to conclude that the particular person or partnership was the only person or partnership that acquired, in respect of the transfer, an interest as a beneficiary under the trust,
  • the particular person or partnership was required, under the securities law of a country or of a political subdivision of the country in respect of the issuance of beneficial interests by the trust, to acquire the interest because of the particular person or partnership's status at the time of the transfer as a manager or promoter (as defined in subsection 94(1)) of the trust,
  • at the particular time, the trust is not an exempt foreign trust, but would be at that time an exempt foreign trust if it had not made an election under paragraph (h) of the definition "exempt foreign trust", and
  • the particular time is before the earliest of
    • the first time at which the trust becomes an exempt foreign trust,
    • the first time at which the particular person or partnership ceases to be a manager or promoter of the trust, and
    • the time that is 24 months after the first time at which the total fair market value of consideration received by the trust in exchange for beneficial interests (other than the particular person or partnership's interest referred to in subparagraph 94(2)(s)(iii)) in the trust is greater than $500,000.

Paragraph 94(2)(t) generally expunges a contribution of shares or indebtedness of a Canadian corporation from the corporation to a trust if the corporation issued (in circumstances described in subparagraph 94(2)(g)(i) or (iv)) the shares or the debt to the trust and the trust later sells the shares or indebtedness in circumstances in which the parties to the sale deal with each other on an arm's length basis.

However, the application of paragraph 94(2)(t) will not affect the application of paragraph 94(2)(g) in respect of the original transfer by the corporation to the trust or the other person or partnership: such transfers will continue to be treated as transfers under section 94. In addition, the application of paragraph 94(2)(t) will not expunge the status as a contribution to the trust of a transfer made by a person or partnership and involving the corporation (e.g., a person or partnership that transferred property to the corporation, and hence the trust, because of the application of paragraph 94(2)(m)).

More specifically, under paragraph 94(2)(t) a transfer, by a Canadian corporation of particular property (i.e., a share or debt), that is at a particular time a contribution by the Canadian corporation to a trust, is deemed not to be, after the particular time, a contribution by the Canadian corporation to the trust if

  • the trust acquired the particular property before the particular time from the Canadian corporation in circumstances described in subparagraph 94(2)(g)(i) or (iv);
  • as a result of a transfer (i.e., a sale of, or a redemption by the Canadian corporation of, the issued shares or debt) at the particular time by any person or partnership (referred to in the paragraph as the "seller") to another person or partnership (referred to in the paragraph as the "buyer") the trust ceases to hold all of its property that is shares of the capital stock of, or debt issued by, the Canadian corporation and the trust ceases to hold property that is property the fair market value of which is derived in whole or in part, directly or indirectly, from shares of the capital stock of, or debt issued by, the Canadian corporation;
  • the buyer deals at arm's length immediately before the particular time with the Canadian corporation, the trust and the seller;
  • in exchange for the sale, the buyer transfers or becomes obligated to transfer property (which property is referred to in the paragraph as the "consideration"), to the seller; and
  • it is reasonable to conclude
    • having regard only to the sale and the consideration that the seller would have been willing to make the sale if the seller dealt at arm's length with the buyer,
    • that the terms and conditions made or imposed in respect of the exchange are terms and conditions that would have been acceptable to the seller if the seller dealt at arm's length with the buyer, and
    • that the value of the consideration is not, at or after the particular time, determined in whole or in part, directly or indirectly, by reference to shares of the capital stock of, or debt issued by, the Canadian corporation.

Paragraph 94(2)(u) applies to a transfer, before October 11, 2002, to a personal trust by an individual (other than a trust) of particular property. Where the conditions in subparagraphs 94(2)(u)(i) and (ii) are met, the transfer of the particular property is deemed not to be a contribution of the particular property by the individual to the trust. Paragraph 94(2)(u) is intended to provide relief to individuals that have transferred a relatively small amount of property to a trust (e.g., the initial settlement of a coin on the trust) where the individual can reasonably be considered not to have been involved with the use of the trust as part of what is commonly referred to as an estate freeze (i.e., see the condition in clause 94(2)(u)(ii)(A) that the trust never have acquired from the individual restricted property).

The conditions in subparagraphs 94(2)(u)(i) and (ii) are that

  • the individual identifies the trust in prescribed form filed with the Minister on or before the individual's filing-due date for the individual's 2003 taxation year (or a later date that is acceptable to the Minister), and
  • the Minister is satisfied that
    • the individual (and any person or partnership not dealing at any time at arm's length with the individual) has never loaned or transferred, directly or indirectly, restricted property to the trust,
    • in respect of each contribution (determined without reference to paragraph 94(2)(u)) made before October 11, 2002 by the individual to the trust, none of the reasons (determined by reference to all the circumstances including the terms of the trust, an intention, the laws of a country or the existence of an agreement, a memorandum, a letter of wishes or any other arrangement) for the contribution was to permit or facilitate, directly or indirectly, the conferral at any time of a benefit (for greater certainty, including an interest as a beneficiary under the trust) on

(I) the individual,

(II) a descendant of the individual, or

(III) any person or partnership with whom the individual or descendant does not, at any time, deal at arm's length, and

  • the total of all amounts each of which is the amount of a contribution (determined without reference to paragraph 94(2)(u)) made before October 11, 2002 by the individual to the trust does not exceed the greater of

(I) 1% of the total of all amounts each of which is the amount of a contribution (determined without reference to paragraph 94(2)(u)) made to the trust before October 11, 2002, and

(II) $500.

Liabilities of Non-resident Trusts and Others

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94(3)

New subsection 94(3) of the Act applies to a non-resident trust (other than an "exempt foreign trust", as defined in subsection 94(1)) for a taxation year where, at a "specified time" in respect of the trust for the taxation year (generally, the end of the taxation year), there is a "resident contributor" to the trust or a "resident beneficiary" under the trust. All of these defined expressions are explained in detail in the commentary on new subsection 94(1).

Where subsection 94(3) applies to a non-resident trust for a taxation year, the trust is deemed to be resident in Canada throughout the year for the purposes specified in paragraph 94(3)(a). Except to the extent otherwise provided by subsection 94(4), a trust is deemed to be resident in Canada for a taxation year under subsection 94(3):

  • for the purposes of applying section 2, in computing the trust's income for the year and computing the trust's liability for tax under Part I – with the result that the trust is subject to tax under that Part on its world-wide income for the year (including, for example, its income determined as a result of deemed dispositions under subsections 104(4) to (5.2) or 128.1(4) and, for example, in determining whether a foreign affiliate of the trust is its controlled foreign affiliate and whether it has FAPI) that is not distributed to beneficiaries of the trust or attributed to resident contributors of the trust; however, because of paragraph 94(3)(f), the trust will not be required to include in computing its income certain non-Canadian source income from property to the extent that it forms part of its "non-resident portion";
  • for the purpose of subsection 111(9), with the result that in determining the trust's losses for the taxation year, subsection 111(9) will not apply in computing its taxable income for the year;
  • for the purpose of applying clause 53(2)(h)(i.1)(B) – with the result that the adjusted cost base to a beneficiary of the beneficiary's interest in a trust to which this clause applies is computed in the same way as for interests in trusts resident in Canada;
  • for the purpose of applying the amended definition "non‑resident entity" in subsection 94.1(2) – with the result that a beneficiary's interest in the trust is not treated as an interest of a beneficiary in an offshore investment fund property for the purpose of section 94.1;
  • for the purposes of applying subsections 104(13.1) to (29), and 107(2.1) and (2.002) and section 115 – with the result that the tax treatment of beneficiaries under the trust generally accords with the tax treatment available to beneficiaries under trusts that are resident in Canada;
  • for the purposes of determining the obligation of the trust to file a return under sections 233.3 and 233.4 – with the result that the trust is required to file information returns under sections 233.3 (information return on foreign property holdings the total cost of which exceeds $100,000) and 233.4 (information return on foreign affiliates);
  • for the purpose of determining the liability of the trust for tax under Part XIII – with the result that the trust is exempt from Part XIII tax on amounts paid or credited to it (for more detail, see the commentary to subsection 94(4));
  • for the purpose of applying Part XIII in respect of an amount (other than an exempt amount) paid or credited by the trust to any person;
  • for the purpose of determining after July 18, 2005 whether a foreign affiliate of a taxpayer (other than the trust) is a controlled foreign affiliate of the taxpayer; and
  • for the purpose of determining the rights and obligations of the trust under sections 150 to 180 – with the result that various administrative provisions in the Act apply in the same way as to other trusts resident in Canada. These provisions include those with regard to the filing of returns, assessments, tax payments, arrears interest, refund interest, instalment interest, penalties, refunds and appeals.

Under paragraph 1 of the resident article in Canada's income tax treaties, a reference in such a treaty to a "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation in that State by reason of the person's domicile, residence, place of management or any other criterion of a similar nature. A person, in this context, would generally include a trust because of the usual definition "person" in Canada's income tax treaties. Because a trust to which subsection 94(3) applies is resident in Canada, and is liable to tax in Canada because of being resident in Canada, it will be considered a resident of Canada under paragraph 1 of the resident article in Canada's income tax treaties, whether it is also considered to be resident, under the applicable treaty, in another country or not.  An amendment to the Income Tax Conventions Interpretation Act, described elsewhere in this commentary, ensures that this result applies consistently across Canada's tax treaties.

Where subsection 94(3) applies to deem a trust to be resident in Canada for a particular taxation year of the trust, new paragraph 94(3)(b) provides a number of rules for determining the recognition by Canada of foreign taxes paid by the trust. In particular, new paragraph 94(3)(b) provides in respect of the trust for the particular taxation year that:

  • no deduction under subsection 20(11) of the Act is permitted; however, a deduction continues to be available to the trust under subsection 20(12) of the Act in respect of non-business income tax paid by the trust in respect of an item of income included in computing the trust's income for the year;
  • taxes paid in respect of an item excluded from the trust's income because of subparagraph 94(3)(f)(i) – that is, certain amounts excluded in respect of the trust's non-resident portion – are not included in computing the trust's business-income tax (BIT) and non-business-income tax (NBIT) for purposes of subsection 20(12) and section 126 of the Act;
  • for purposes of subsection 20(12) and section 126 of the Act, the NBIT of the trust for the particular taxation year is determined without reference to paragraph (b) of the definition "non-business-income tax", with the result that its resulting NBIT is fully creditable against the trust's Canadian tax otherwise payable for the particular taxation year, or alternatively, fully deductible under subsection 20(12) in computing the trust's income from a source on which the tax was paid; and
  • for purposes of subsection 20(12) and section 126 of the Act, the trust's income, and foreign taxes paid by it, for the particular taxation year are "pooled" to the country, if any, other than Canada in which the trust is resident for the particular taxation year.

Paragraph 94(3)(c) provides that a non-resident trust that becomes subject to subsection 94(3) for a particular taxation year, after not being subject to either new subsection 94(3) or existing paragraph 94(1)(c) for the preceding year, is deemed, immediately before the end of the preceding taxation year, to have disposed of each property (other than property described in any of subparagraphs 128.1(1)(b)(i) to (iv)) held by the trust at that time for proceeds of disposition equal to its fair market value at that time. The trust is also deemed to have acquired, at the beginning of the particular taxation year, each of those properties so disposed of at a cost equal to its proceeds of disposition.

Note, in this regard, that, because of paragraph 94(4)(d), subsection 128.1(1) will not apply in the preceding taxation year only because of the application of paragraph 94(3)(a).

Paragraph 94(3)(c) is intended to ensure – in a manner similar to that for taxpayers that migrate to Canada – that certain gains or losses that accrued on certain property of the trust while the trust was non-resident are not subject to taxation in Canada.

Paragraph 94(3)(c) also complements the rule in subsection 94(6), which applies where a non-resident trust ceases to be an "exempt foreign trust" (as defined in subsection 94(1)). In this case, subsection 94(6) establishes the beginning of a new "stub" taxation year. If subsection 94(3) applies for that "stub" year, paragraph 94(3)(c) would be applicable with regard to the properties held by the trust at the beginning of that "stub" year.

For a summary of the tax consequences resulting from a change in the trust's status for tax purposes, see the commentary under subsection 128.1(1.1).

Example 1

A trust is created in 2011. The trust is not at any time an exempt foreign trust. At the end of its 2011 taxation year, the trust is non‑resident and there are no resident contributors to the trust and no resident beneficiaries under the trust.

On February 1, 2012, John makes a contribution to the trust. At the end of the trust's 2012 taxation year, John is a resident contributor to the trust, and the trust is non‑resident.

On July 1, 2013 the sole trustee of the trust moves to Canada, becomes resident in Canada at that time and remains resident in Canada throughout the remainder of the year. Immediately before the trustee became resident in Canada, the trustee was non‑resident and John remained a resident contributor to the trust.

On July 1, 2014, John ceases to be resident in Canada. There are no other resident contributors to the trust and there are no resident beneficiaries under the trust (taking into account the fact that John is a connected contributor).

Results

Trust's 2011 Taxation Year

1. Subsection 94(3) does not apply to deem the trust to be resident in Canada in computing its income for its 2011 taxation year.

Trust's 2012 Taxation Year

2. Paragraph 94(3)(a) applies to deem the trust to be resident in Canada, throughout its 2012 taxation year, for a number of purposes, including the computation of its income. Because the trust was non‑resident throughout its 2011 taxation year, paragraph 94(3)(c) also applies to deem the trust to have disposed of its property (other than certain properties described in subparagraphs 128.1(1)(b)(i) to (iv)) for fair market value proceeds immediately before the end of its last 2011 taxation year and to have reacquired those properties at a cost equal to that fair market value at the beginning of the 2012 taxation year. Because of paragraph 94(4)(d), the application of the deemed residency rule in paragraph 94(3)(a) will not cause the trust to become resident in Canada for purposes of subsection 128.1(1).

Trust's 2013 Taxation Year

3. Because the trustee of the trust becomes resident in Canada on July 1, 2013, paragraph 128.1(1)(a) will apply to deem the trust to have a taxation year-end immediately before the change of residency. At the end of this first 2013 taxation year of the trust, paragraph 94(3)(a) applies to deem the trust to be resident in Canada, throughout that first 2013 taxation year, for a number of purposes, including the computing of its income. However, paragraph 94(3)(c) will not apply because the trust was resident in Canada (i.e. because of the application of paragraph 94(3)(a) to the trust's 2012 taxation year) throughout the year preceding the 2013 taxation year.

4. Paragraph 128.1(1)(a) also applies to deem the trust to have a new taxation year at the time the trustee becomes resident in Canada on July 1, 2013. Because the trust is resident in Canada at the end of this second 2013 taxation year, paragraph 94(3)(a) does not apply to deem the trust to be resident in Canada in computing its income for that year.

5. As the trust is resident in Canada for the first 2013 taxation year (i.e., the 2013 taxation year discussed in #3 above), subsection 128.1(1.1) suspends the application of the deemed disposition and re-acquisition rules in paragraphs 128.1(1)(b) and (c) that would otherwise apply in respect of the end of that first 2013 taxation year because of the trust becoming resident in Canada on July 1, 2013. This ensures that the trust does not realize at the end of that first 2013 taxation year any accrued gains or losses of the trust solely because the basis of the trust's residency in Canada changes.

6. Note that where subsection 128.1(1.1) applies to a trust, it suspends only the application of paragraph 128.1(1)(b) (as a result of paragraph 128.1(1)(c) also has no application) to the trust. If the trust becomes resident in Canada, it would continue to be subject to paragraph 128.1(1)(a). Also note that paragraph 94(4)(d) ensures that the application of paragraph 94(3)(a) to the trust will not affect the determination of whether the trust becomes resident in Canada for the purposes of subsection 128.1(1).

7. The trust is deemed to cease to be resident in Canada on July 1, 2014 (the earliest time at which there is neither a resident contributor nor a resident beneficiary) by reason of subsection 94(5). As a result, and notwithstanding paragraph 94(4)(e), subsection 128.1(4) will apply to deem the trust to have a taxation year-end immediately before the time it is deemed to cease being resident in Canada. In addition, the deemed disposition and re-acquisition rules in paragraph 128.1(4)(b) and (c) will apply.

Paragraph 94(3)(d) imposes liabilities for a taxation year on persons who are "resident contributors" or "resident beneficiaries". Where subsection 94(3) applies to a trust for a taxation year, each of these persons, other than "electing contributors" for the particular taxation year, is jointly and severally, or solidarily, liable with the trust in respect of the trust's obligations under sections 150 to 180. Typically, the most significant obligation in this context is the obligation to pay tax instalments pursuant to section 156. However, the extent of the liability imposed by paragraph 94(3)(d) is limited by new subsection 94(7). For more information, see the commentary on subsections 94(7) to (9). However, nothing in this paragraph or paragraph 94(3)(e), as described below, limits the liabilities of the trust or of another resident contributor or resident beneficiary under the Act.

The expression "solidarily liable" is added to ensure that the Act appropriately reflects both the civil law of the province of Quebec and the law of other provinces.

Paragraph 94(3)(e) imposes liabilities for a taxation year on each person that is a beneficiary under the trust and was a person from whom an amount would be recoverable at the end of 2006 under subsection 94(2) (as it read in its application to taxation years that end before 2007) in respect of the trust if the person had received before 2007 amounts described under paragraphs 94(2)(a) or (b) in respect of the trust (as those paragraphs read in their application to taxation years that end before 2007). Where subsection 94(3) applies to the trust for a taxation year, each of these persons is, to the extent of the person's recovery limit for the year, jointly and severally, or solidarily, liable with the trust in respect of the trust's obligations under sections 150 to 180. Note that where a trust created after 2000 and before 2007 has elected under the coming-into-force of new section 94 to have new section 94 apply to it for all of its taxation years that end before 2007, paragraph 94(3)(e) does not apply to it (i.e., because "old" section 94 would never have applied to it).

Note that subsection 94(3) generally does not result in the creation of any obligations for a trust that is subject to subsection 94(3) to withhold tax under Part XIII or to pay any tax under Part XII.2 in respect of distributions of income earned by the trust from Canadian sources to non‑resident beneficiaries. Instead, the rules in new subsection 104(7.01) are designed so that there will be a reasonable level of Part I tax in respect of Canadian-source income received by the trust in the event the trust also distributes that income to non‑resident beneficiaries in their capacity as beneficiaries. For more information, see the commentary on subsection 104(7.01).

In addition, in the event that the trust pays or credits an amount to a non‑resident and that amount is not referred to in paragraph 104(7.01)(b) in respect of the trust for the taxation year, the non‑resident will continue to be liable for any Part XIII tax on the amount, except to the extent that the amount is described in paragraph (b) of the definition "exempt amount" in subsection 94(1), or paid or credited before 2004.

Paragraph 94(3)(f) provides additional rules that apply in computing the income of a trust that is deemed to be resident in Canada under paragraph 94(3)(a). First, such a trust's income will be computed without reference to any income from property that is part of the trust's "non-resident portion" (defined under new subsection 94(1) of the Act), except to the extent that the income would be included under any of paragraphs 115(1)(a) to (c) in computing the trust's income earned in Canada for the year if it were at no time in the year resident in Canada. Secondly, such a trust will only be able to deduct an outlay or expense to the extent that it was made or incurred by the trust for the purpose of gaining or producing income from a property that is part of the trust's resident portion.

Paragraph 94(3)(g) of the Act applies when a person withholds and remits Part XIII tax in respect of an amount paid or credited to a trust that is deemed resident in Canada under subsection 94(3). In these circumstances, the amount remitted is deemed to have been paid on account of the trust's Part I tax for the year to the extent that the amount paid or credited to the trust has been included in its income under that Part for the year.

Excluded Provisions

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94(4)

New subsection 94(4) of the Act provides that the rules in paragraph 94(3)(a) treating non‑resident trusts as resident in Canada do not apply for the purposes of:

  • the definitions "arm's length transfer" and "exempt foreign trust" in subsection 94(1) – thus ensuring that there is no circularity in applying those definitions due to fact that those definitions impose a requirement that a trust be non‑resident;
  • subsections 70(6) and 73(1) and paragraph 107.4(1)(c) (other than, for transfers to trusts that occurred before February 28, 2004, subparagraph 107.4(1)(c)(i)), and paragraph (f) of the definition "disposition" in subsection 248(1) – thus ensuring that rules allowing in some cases for a rollover of property on transfers to a Canadian resident trust generally do not apply to transfers to a trust otherwise deemed to be resident in Canada by subsection 94(3));
  • determining whether subsection 107(5) applies to a distribution on or after July 18, 2005 of property to the trust;
  • determining whether an amount can be attributed, under subsection 75(2), to the trust;
  • determining whether the exception, under paragraph 94(14)(a), to property that is restricted property is available in respect of property held by a non‑resident trust;
  • paragraph (a) of the definition "mutual fund trust" in subsection 132(6) – making it clear that a trust deemed to be resident in Canada by subsection 94(3) will not be treated as a mutual fund trust for any purpose;
  • determining, for taxation years that begin after July 18, 2005, whether a partnership is a "Canadian partnership" (as defined in subsection 102(1) of the Act); and
  • determining whether, in applying subsection 128.1(1), the trust becomes resident in Canada at a particular time and determining whether, in applying subsection 128.1(4), the trust ceases to be resident in Canada at a particular time – thus ensuring that the deeming of a trust to be resident under paragraph 94(3)(a) does not apply to affect a determination of whether a trust has changed residence at any time (e.g., upon a change of trustees or upon a change of residence of trustees).

Note that paragraphs 94(4)(d) and (e) are generally suspended, for a brief transitional period, in their application to a trust that is subject without interruption to "old" and "new" sections 94. That transitional period starts immediately before the end of the trust's last taxation year that ends before 2007 and for which it was deemed resident by "old" section 94 and ends immediately after the beginning of the trust's first taxation year that ends after 2006 (i.e., its first taxation year in respect of which "new" section 94 applies). This is intended to ensure that section 128.1 does not apply to a trust solely because of the transition between the old and new NRT regimes. The suspension of paragraphs 94(4)(d) and (e) does not apply, however, where in the transitional period a change in the trustees of the trust occurred (e.g., the number of trustees changed, the residency of any of the trustees changed, or any of the trustees was replaced). For a summary of the tax consequences resulting from a change in the trust's status for tax purposes, see the commentary under subsection 128.1(1.1).

Furthermore, except as otherwise permitted under subsection 216(4.1) of the Act, paragraphs 94(3)(a) and 94(4)(c) do not relieve a payer of Canadian-source income from the obligation to withhold amounts under section 215 in connection with amounts paid to a trust deemed to be resident in Canada by subsection 94(3). This is so even though such a trust is not itself liable for Part XIII tax on amounts paid or credited to it, because of the application of subparagraph 94(3)(a)(viii). However, any Part XIII taxes withheld in respect of amounts that are paid or credited to the trust and included in its income will, under paragraph 94(3)(g), be treated as having been paid on account of the trust's liability for tax under Part I of the Act.

Deemed Cessation of Residence

ITA
94(5)

New subsection 94(5) of the Act deems a trust to have ceased to be resident in Canada at the earliest time in a specified period at which there is neither a "resident contributor" to the trust nor a "resident beneficiary" under the trust. For this purpose, the specified period is the period that would (if the Act were read without reference to subsection 128.1(4)) be a taxation year of the trust

  • that immediately follows a taxation year of the trust throughout which it was resident in Canada,
  • at the beginning of which there was either a resident contributor to the trust or a resident beneficiary under the trust, and
  • at the end of which the trust is non‑resident.

For more information on the expressions "resident contributor" and "resident beneficiary", as defined in new subsection 94(1), see the commentary on those provisions.

Where subsection 94(5) applies, the cessation of residence in Canada of a trust results in the application of subsection 128.1(4). Under that subsection, a taxation year of the trust is deemed to have ended immediately before the earliest time in the specified period described above. At that deemed taxation year-end, the criteria in subsection 94(3) are satisfied. Accordingly, the trust will be subject to tax under Part I on its world-wide income for that year because it is considered under subsection 94(3) to be resident in Canada throughout that year. Under new paragraph 94(3)(d), each "resident beneficiary" or "resident contributor" at the time of that deemed taxation year end, other than "electing contributors" for the particular taxation year, can be jointly and severally, or solidarily, liable with the trust for the trust's income tax liabilities under the Act for that year. For more detail on the expression "solidarily", please refer to the introductory commentary above on new section 94.

For a summary of the tax consequences resulting from a change in the trust's status for tax purposes, see the commentary under subsection 128.1(1.1).

Becoming or Ceasing to be an Exempt Foreign Trust

ITA
94(6)

New subsection 94(6) of the Act generally provides that, if a trust becomes or ceases to be an "exempt foreign trust" (as defined in new subsection 94(1)) at any time, the trust's taxation year is deemed to have ended immediately before that time, a new "stub" taxation year is deemed to have begun at that time, and the trust is deemed not to have established a fiscal period before that time. However, subsection 94(6) does not apply where a trust ceases to be an exempt foreign trust because it becomes resident in Canada.

For example, where subsection 94(6) applies because a trust ceases to be an exempt foreign trust, subsection 94(3) may apply to deem the trust to be resident in Canada for the new "stub" taxation year of the trust if the criteria set out in that subsection are satisfied at a "specified time" in respect of the trust for the taxation year (generally, the end of the taxation year). Where this is the case, the trust would be subject to tax under Part I on its world-wide income for that new "stub" year, subject to any amount that is attributed to a resident contributor, because it would be considered under subsection 94(3) to be resident in Canada for that year.

Limit to Amount Recoverable

ITA
94(7) and (8)

New subsection 94(7) of the Act allows for a limitation of the amount that may be recovered from a person that would otherwise be jointly and severally, or solidarily, liable for the entire amount of a trust's tax obligations under the Act. Subsection 94(7) applies to a person (other than one deemed, by subsection 94(12) or (13), to be a contributor or a resident contributor to the trust) in respect of a particular taxation year of the trust where three conditions are satisfied.

The first condition is satisfied in respect of a particular taxation year of the trust if

  • under subparagraph 94(7)(a)(i), the person is jointly and severally, or solidarily, liable with the trust only because the person was a "resident beneficiary" (as defined in new subsection 94(1)) under the trust at a specified time in respect of the trust for the particular year, or
  • under subparagraph 94(7)(a)(ii), at a specified time in respect of the trust for the particular year, the total amount (determined with reference to paragraphs 94(2)(b), (e), (h), (p) and (q) and subsection 94(9)) of contributions made to the trust by the person (or by another person or partnership not dealing at arm's length with the person) is not more than the greater of $10,000 and 10% of the total amount of all contributions made to the trust before that time.

The second condition, under paragraph 94(7)(b), requires that the person have filed on a timely basis all information returns required to be filed by the person in respect of the trust under section 233.2 (or on any later day that is acceptable to the Minister of National Revenue). However, the second condition need not be satisfied if the first condition is satisfied because the total determined under subparagraph 94(7)(a)(ii) (in respect of the person and all persons or partnerships not dealing at arm's length with it) is $10,000 or less.

The third condition, under paragraph 94(7)(c), is satisfied in respect of a person and a particular taxation year of the trust where it is reasonable to conclude that each transaction or event that occurred before the end of the particular year at the direction of, or with the acquiescence of, the person satisfied the following conditions:

  • none of the purposes of the transaction or event was to enable the person to avoid or minimize any liability under a provision referred to in paragraph 94(3)(d) in respect of the trust, and
  • the transaction or event was not part of a series of transactions or events any of the purposes of which was to enable the person to avoid or minimize any liability under a provision referred to in paragraph 94(3)(d) in respect of the trust.

There are a number of transactions or events, or series of transactions or events, that may result in a failure to satisfy the third condition (e.g., an artificial dilution of a person's relative contribution to the trust (i.e., below the 10% level); or corporate distributions that have the effect of avoiding or minimizing the impact of the three‑year rule described in subsection 94(9)).

Reference should be made in this context to the definition "contribution" in subsection 94(1), as well as to related rules in subsection 94(2).

Where subsection 94(7) applies to a person in respect of a taxation year of a trust, the amount recoverable at any time from the person in respect of the year is limited to the person's "recovery limit", determined under subsection 94(8), in respect of the trust and the year.

Under subsection 94(8), the amount of the recovery limit that applies to a particular person at any particular time is calculated as follows:

  • ADD amounts received or receivable after 2000 and before the particular time by the particular person on the disposition of all or part of the particular person's interest as a beneficiary under the trust, or by another person or partnership that was, at the time the amount became receivable, a specified party (as defined in subsection 94(1)) in respect of the particular person on the disposition of all or part of the specified party's interest as a beneficiary under the trust;
  • ADD an amount (other than an amount described in the paragraph above) made payable by the trust after 2000 and before the particular time to the particular person because of the interest of the particular person as a beneficiary under the trust, or to another person or partnership (that was, at the time the amount became payable, a specified party in respect of the particular person) because of the interest of the specified party as a beneficiary under the trust;
  • ADD the amount of any loan received after ANNOUNCEMENT DATE by the particular person, or by another person or partnership (that was, when the amount was received, a specified party in respect of the particular person) to the extent that the amount has not been repaid;
  • ADD the fair market value of benefits received or enjoyed (other than amount described in the paragraphs above), after 2000 and before the particular time, under the trust by the particular person (or by a person or partnership that was, at the time the benefit was received or enjoyed, a specified party in respect of the particular person);
  • ADD the maximum amount that would be recoverable from the particular person at the end of the trust's 2006 taxation year under "old" subsection 94(2) (i.e., as it read in its application to taxation years that end before 2007) if the trust had had tax payable under Part I of the Act at the end of that taxation year in excess of the total of the amounts described in respect of the particular person under "old" paragraphs 94(2)(a) and (b) (i.e., as they read in their application to taxation years that end before 2007), except to the extent that the amount so recoverable is in respect of an amount that is included in the particular person's recovery limit because of subparagraph 94(8)(a)(i) or (ii) (note that where a trust created after 2000 and before 2007 has elected under the coming-into-force of new section 94 to have new section 94 apply to it for all of its taxation years that end before 2007, the amount described by this paragraph would not apply in respect of it because "old" section 94 would never have applied to it);
  • ADD, to the extent that it exceeds the total of the first five amounts, the total amount (determined with reference to paragraphs 94(2)(b), (e), (h), (p) and (q) and subsection 94(9)) of contributions made to the trust by the particular person;
  • SUBTRACT previous recoveries by the CRA under subsection 94(3) or under "old" section 94 (i.e.,  as it read in its application to taxation years that end before 2007);
  • SUBTRACT previous recoveries by the CRA under subsection 94(3) or under "old" section 94 (i.e.,  as it read in its application to taxation years that end before 2007) from a specified party in respect of the particular person in respect of the trust and the year or a preceding taxation year of the trust; and
  • SUBTRACT the amount, if any, by which the particular person's tax payable under Part I of the Act for any taxation year in which an amount described in any of subparagraphs 94(8)(a)(i) to (iv) was paid, became payable, was received, became receivable or was enjoyed by the particular person exceeds the amount that would have been the particular person's tax payable under Part I of the Act for that taxation year if no such amount were paid, became payable, were received, became receivable or were enjoyed by the particular person in that taxation year.

For more information on subsections 94(11) to (13), or the expression "specified party" as defined in subsection 94(1), see the commentary on those provisions.

Determination of Contribution Amount

ITA
94(9)

Subsection 94(9) affects the calculation of the amount of a "contribution" (as defined in new subsection 94(1)) to a trust of "restricted property" (as defined in new subsection 94(1)). This special rule will be relevant in determining whether the "recovery limit" limitation applies to a contributor to the trust, and in determining the amount of that recovery limit. The rule is also relevant to determining certain amounts in respect of trust contributions under sections 162 and 164 of the Act, as well as amounts in respect of an electing contributor for purposes of the attribution regime in subsections 94(16) and (17).

The amount of a contribution to a trust because of a transfer to the trust of restricted property is deemed by subsection 94(9) to be the greater of:

  • the amount, otherwise determined, at that time of the contribution; and
  • the amount that is the greatest fair market value of the restricted property (or of substituted property, determined by reference to subsection 248(5) of the Act)) in the period that begins immediately after that time and ends at the end of the third calendar year after that time.

For more information on the expression "restricted property" as defined in new subsection 94(1), see the commentary on that definition.

Subsection 94(9) allows for a reasonable opportunity for recovery of tax by the CRA in the context of a transaction or series of transactions involving the transfer of restricted property. Consider, for example, an estate freeze under which common shares in the capital stock of a corporation are transferred directly or indirectly to a non-resident trust. Because of the difficulties associated with valuing the common shares at the time of the transfer, it is appropriate to provide for a valuation as described above.

In conjunction with new subsection 94(9), new subparagraph 152(4)(b)(vii) of the Act is added to ensure, among other things, that a reassessment of a taxpayer arising out of the application of subsection 94(9) can be undertaken by the CRA within 3 years after the normal reassessment period of the taxpayer in respect of the taxpayer's relevant taxation year.

Where Contributor Becomes Resident in Canada within 60 Months after Making a Contribution

ITA
94(10)

New subsection 94(10) of the Act applies to determine whether there is a "connected contributor" (as defined in new subsection 94(1)) to a trust for the purposes of section 94, including in applying the definition "resident beneficiary" (as defined in new subsection 94(1)). Under new paragraph 94(3)(d) of the Act, a resident beneficiary can, to an extent, be liable for the trust's income tax under Part I of the Act. For more information, see the commentary on those definitions and subsections 94(3) and (7) to (9).

A "contribution" (as defined in new subsection 94(1)) to a trust by a contributor is considered to have been made at a time other than a "non‑resident time" (as defined in subsection 94(1)) if the contributor becomes resident in Canada at any time within the period (referred to in this commentary as the "60-month post period") 60 months after the time of the contribution. However, to facilitate the administration of the definition "non‑resident time", paragraph (b) of the definition "connected contributor" and subsection 94(3), the definition "non‑resident time" is drafted so that such a contributor and the trust may, subject to subsection 94(10), treat the time of the contribution as a non‑resident time for the purposes of applying the definition "connected contributor" and subsection 94(3) at a "specified time" (as defined in new subsection 94(1)) in respect of the trust for any particular trust taxation year if at the specified time the contributor still has not become resident in Canada within the 60‑month post period.

Subsection 94(10) deems (for the purpose of applying section 94 at each specified time, in respect of a trust for a taxation year of the trust, that is before the particular time at which the contributor becomes resident in Canada within the 60-month post period) the contribution to have been made at a time other than a non‑resident time of the contributor if:

  • in applying the definition "non‑resident time" as of each of those specified times, the particular contribution was made at a non‑resident time of the contributor; and
  • in applying the definition "non‑resident time" at the particular time, the contribution is made at a time other than a non‑resident time of the contributor.

Where subsection 94(10) applies, the contributor will be considered to be a "connected contributor" to the trust and, if, as a result, there was a "resident beneficiary" at a specified time in the relevant prior taxation year of the trust. In cases where the trust was not already deemed by subsection 94(3) to be resident in Canada for the prior year (i.e., because for the prior year there were no resident contributors to the trust and no the resident beneficiaries under the trust), the trust would be treated as resident in Canada for that year  and the resident beneficiary would, because of subsection 94(3), generally be jointly and severally, or solidarily, liable for Part I tax on the trust's income for the prior year. In this regard, please refer to the commentary on paragraphs 94(3)(c) and (d). For more details on the expression "solidarily", please refer to the introductory commentary above on new section 94. For more information on the definition "electing contributor", see the commentary on that definition.

New subparagraph 152(4)(b)(vii) of the Act is added to ensure, among other things, that a reassessment of a taxpayer arising out of the application of subsection 94(10) can be undertaken by the CRA within 3 years after the normal reassessment period of the taxpayer in respect of the taxpayer's relevant taxation year.

Deemed Contributor or Resident Contributor

ITA
94(11) to (13)

Subsections 94(11) to (13) provide a set of related anti-avoidance rules that apply where it is reasonable to conclude that one of the reasons for a loan or transfer of property from a trust (the "original trust"), that is deemed under paragraph 94(3)(a) to be resident in Canada (or was deemed resident because of "old" subsection 94(1) as it read in its application to taxation years that end before 2007 or would have been so deemed under either of those provisions if they had applied without regard to the period of time in which a contributor to the trust was resident in Canada), to another trust (the "transferee trust") is to avoid or minimize the liability, of any person under Part I of the Act, that arose, or that would otherwise have arisen, because of the application of section 94 (or because of subsection 94(1) as it read in its application to taxation years that end before 2007). Note that if a deemed Canadian resident trust, that was created after 2000 and before 2007 and that has elected under the coming-into-force of new section 94 to have new section 94 apply to it for all of its taxation years that end before 2007, has made a transfer described by paragraph 94(11)(a), the trust will be an "original trust" by operation of subparagraph 94(11)(b)(i).

Where a loan or transfer described by subsection 94(11) is made at a particular time, the original trust is deemed, under subsection 94(12), to be a resident contributor to the transferee trust for the purpose of applying section 94 in respect of the transferee trust.

Where such a loan or transfer is made at a particular time, a person that is at that time a contributor to the original trust is deemed, under subsection 94(13), to be a contributor to the transferee trust and (if at that time the person is also a connected contributor to the original trust) a connected contributor to the transferee trust. For more information on the definitions "contributor" and "connected contributor" in subsection 94(1), see the commentary on those definitions.

Subsection 94(7) of the Act, generally provides that the liability of a "resident contributor" is limited by that contributor's recovery limit, as determined by reference to subsections 94(7) to (9). However, subsection 94(7) does not apply to a person that is deemed, by subsection 94(12) or (13), to be a contributor or a resident contributor to the trust. For more information on the definition "resident contributor" or subsections 94(3) and (7) to (9), see the commentary on those provisions.

Restricted Property – Exceptions

ITA
94(14)

Subsection 94(14) of the Act provides two separate rules that can operate to suspend, in limited circumstances, a particular property's status as restricted property of a particular person or partnership.

Paragraph 94(14)(a) provides that a particular property that is at any time held, loaned or transferred by the particular person or partnership will not be treated as restricted property held, loaned or transferred at that time by the person or partnership if

  • the particular property (or property for which the particular property is, or is to be, substituted property) was not, and will not be, at any time acquired, held, loaned or transferred by the person or partnership (or any person or partnership with whom the person or partnership does not at any time deal at arm's length) in whole or in part for the purpose of permitting any change in the value of the property of a corporation (that is, at any time, a closely-held corporation) to accrue directly or indirectly in any manner whatever to the value of property held by a non‑resident trust (n.b., because of subsection 94(4) a non-resident trust includes here a trust that is deemed to be resident in Canada for other purposes under subsection 94(3));
  • the Minister is satisfied that this is the case with respect to the property (and property, if any, for which it is to be substituted); and
  • the particular property is identified in prescribed form with prescribed information.

In the case of a person, the prescribed form in which the particular property is identified must be filed by the person's filing-due date for the person's taxation year that includes that time. In the case of a partnership, the prescribed form must be filed on or before the day on which a return is required by section 229 of the Regulations to be filed in respect of the partnership (or would be required to be filed if that section applied to the partnership). In either case, the prescribed form may be filed on or before another date acceptable to the Minister. That other date will generally be a date later than the person or partnership's relevant filing due-date, but in circumstances in which the person or partnership has no filing-due date, the other date is intended to provide the Minister with the ability to choose a filing deadline for the prescribed form.

Paragraph 94(14)(b) provides that property is not restricted property of a particular person or partnership that is held, loaned or transferred, as the case may be, at that time by the particular person or partnership if at that time:

  • the particular property is a share of the capital stock of a corporation, a specified fixed interest in a trust, or an interest as a limited partner in a partnership;
  • there are at least 150 persons each of whom holds at that time property that at that time is identical to the particular property, and has a total fair market value of at least $500;
  • the total of all amounts each of which is the fair market value, at that time, of the particular property (or of identical property that is held, at that time, by the particular person or partnership or a person or partnership with whom the particular person or partnership does not deal at arm's length) does not exceed 10% of the total fair market value, at that time, of the particular property and of identical property held by any person or partnership;
  • property that is identical to the particular property can normally be acquired by and sold by members of the public in the open market; and
  • the particular property, or identical property, is listed on a designated stock exchange

For more details on the definitions "restricted property" and "closely-held corporation", see the commentary on those provisions.

Anti-avoidance

ITA
94(15)

New subsection 94(15) of the Act is an anti-avoidance provision.

Determining whether There are 150 Persons

Paragraph 94(15)(a) of the Act is relevant to the application of the definition "closely-held corporation" in subsection 94(1), paragraph (h) of the definition "exempt foreign trust" in subsection 94(1), and paragraph 94(14)(b). These provisions, respectively, provide for different results based, in part, on the condition that there be at a particular time at least 150 shareholders of the capital stock of a corporation, at least 150 beneficiaries under a trust, or at least 150 persons that hold property (identical to a particular property) issued by a trust, corporation or limited partnership.

New paragraph 94(15)(a) provides that, if it can reasonably be considered that one of the main reasons that a person or partnership is at any time a shareholder of a corporation, holds a capital interest in a trust, or holds a property is to cause the applicable condition above to be met in respect of the corporation, the trust or – in the case of paragraph 94(14)(b) – the particular property (or an identical property), the condition is deemed not to have been met with respect to the corporation, the trust or the particular or identical property.

Where paragraph 94(15)(a) applies in respect of a particular time and in respect of the corporation or trust, in the case of the corporation, it would be treated at that time as a closely-held corporation and in the case of the trust, it would not be treated at that time as an exempt foreign trust. In the case of paragraph 94(14)(b), the particular property and the identical property would no longer qualify under paragraph 94(14)(b) for an exemption from treatment as restricted property.

Exempt Foreign Trusts – paragraph (f)

New paragraph 94(15)(b) applies if at any time a resident contributor has contributed restricted property – or contributes property for which restricted property is later substituted (including by reference to subsection 248(5) of the Act) – to a trust. Where this is the case, for each taxation year of the trust for which it is at or after the contribution and at a specified time in that taxation year (generally meaning the end of the taxation year) an exempt foreign trust because of paragraph (f) of the definition "exempt foreign trust" in subsection 94(1), any of the trust's income from, or taxable capital gains from the disposition of, the restricted property is not to be included in computing the trust's income. Instead, those amounts are to be included in computing the income of the resident contributor for its taxation year in which the relevant trust taxation year ends.

Exempt Foreign Trusts – paragraph (h)

New paragraph 94(15)(c) is intended to apply to trusts that initially qualify for the commercial trust exemption under paragraph (h) of the definition "exempt foreign trust", but that compromise an essential indicator of commerciality as a result of the interest of a beneficiary under the trust ceasing to be fixed. The anti-avoidance rule seeks to ensure that the trust is taxed as though it were not an exempt foreign trust during the entire period in which there are Canadian investors in the trust and the trust qualified as an exempt foreign trust under paragraph (h) of that definition.

Paragraph 94(15)(c) applies in respect of a trust for a particular taxation year of the trust if at the end of its immediately preceding taxation year it was an exempt foreign trust because of paragraph (h) of the definition "exempt foreign trust" in subsection 94(1), and in the particular taxation year the beneficial interest of a given trust investor ceases to be a specified fixed interest (as defined in new subsection 94(1)) in the trust (n.b., in these circumstances, the beneficial interests of all of the trust's investors would be expected to also cease to be specified fixed interests in the trust because the definition "specified fixed interest" requires that none of the rights to income or capital in respect of any interest under the trust depend upon a discretionary power).

Where this is the case, the trust is, in general terms, required to include a specified amount in computing its income for the particular taxation year. The specified amount is intended to be a proxy for the trust's accumulated income. More specifically, that amount is the increase, if any, in the net fair market value of the trust from the initial time at which there are Canadian investors in the trust and the trust qualifies as an exempt foreign trust under paragraph (h) of that definition to the end of the immediately preceding taxation year, minus the total amount of contributions made to the trust in that period ("the interest gross-up period").

In addition to this income inclusion for the trust in the particular taxation year, for each taxation year of the trust included in its interest gross-up period, the trust is made liable for unpaid instalment interest, computed as though the trust had unpaid Canadian taxes for the year (using the federal rate of 42.92% that applies for inter vivos trusts that have income not earned in a province) in respect of the specified amount. The resulting excess is in addition to any other excess otherwise determined in respect of the trust under subsection 161(1) of the Act.

Attribution to Electing Contributors

ITA
94(16)

New subsection 94(16) of the Act provides rules for attributing the income of a trust that is deemed to be resident in Canada under new subsection 94(3) to its electing contributors. The provision applies on an electing contributor-by-electing contributor basis. Losses of a trust cannot be attributed to an electing contributor. However, the amount of trust income to be attributed to an electing contributor is reduced by the amount of the trust's losses of other years deducted by the trust in computing its taxable income. For more information on the definition "electing contributor" in new subsection 94(1), see the commentary on that definition.

New paragraph 94(16)(a) of the Act provides for an income inclusion for an electing contributor in respect of a trust. This income inclusion is computed by subtracting from the trust's income for the taxation year the amounts deducted by the trust under section 111 of the Act as losses for the year (thus ensuring that electing contributors benefit from their proportionate share of trust losses), and multiplying the result by the proportion that the electing contributor's share of contributions made to the trust is of the total amount that would be contributions to the trust by resident contributors or connected contributors if those contributors were electing contributors in respect of the trust. This proportion is itself computed to account for joint contributors (as defined under new subsection 94(1)). If there are joint contributors in respect of the trust and a contribution, the electing contributor's share of that contribution will be divided equally among the number of joint contributors in respect of that contribution. Paragraph 94(16)(a) therefore has the effect of attributing to electing contributors their proportionate share of the income of the trust. Paragraph 94(16)(a) provides that the income of the trust that is available to be attributed to electing contributors is its income computed after taking into account deductions available to the trust for amounts allocated to trust beneficiaries, but before taking into account amounts deducted by the trust under paragraph 94(16)(f). (After applying the attribution rules to any electing contributors in respect of the trust, the remaining income, if any, in the trust – ignoring income retained for purposes of applying losses in computing the trust's taxable income – would be subject to Part I tax. It is expected that this would mainly be income derived from contributions by former residents of Canada.)

New paragraph 94(16)(b) characterizes the income attributed to electing contributors of a trust. It operates, subject to the rules in new paragraph 94(16)(c), to deem amounts included in the income of electing contributors under paragraph 94(16)(a) to be income from property from a source in Canada.

New paragraphs 94(16)(c) to (e) provide rules that permit a trust to designate, for electing contributors in respect of the trust, an amount of the trust's foreign income. Such a designation is made by the trust on a source-by-source basis. Where the designation is made, the amount designated is deemed, for the purposes of paragraphs 94(16)(c) and (d) and section 126, to be the electing contributor's income for the year from that source. These rules operate in a manner similar to rules in subsections 104(22) to (22.3) of the Act that apply in respect of amounts made payable to beneficiaries under a trust.

A trust designation under these rules in respect of a source of its income is valid only if it is reasonable to consider that the amount designated is part of the amount included under paragraph 94(16)(a) in the income of the electing contributor for the electing contributor's taxation year in which that trust year ends, and only if the total of the amounts designated by the trust under paragraph 94(16)(c) or subsection 104(22) in respect of that source does not exceed the trust's income for its taxation year from that source.

New paragraph 94(16)(d) treats an electing contributor, as a consequence of the trust's designation of a source under paragraph 94(16)(c) in the contributor's favour, as having paid in respect of the source a pro-rata share of the business-income tax or non-business-income tax paid by the trust. The pro-rata share for the electing contributor is equal to the proportion of the trust's income from that source giving rise to such tax that was designated by the trust in favour of the electing contributor. For this purpose, paragraph 94(16)(d) specifies that the terms "business-income tax" and "non-business-income tax" have, in subsection 94(16), the meanings as defined under subsection 126(7) of the Act.

New paragraph 94(16)(e) requires that a trust recalculate, for purposes of the trust computing certain deductions in respect of foreign taxes paid by it, amounts of its income and business-income tax and non-business-income tax to account for the designation made in favour of electing contributors.

New paragraph 94(16)(f) provides a trust with a deduction for a taxation year corresponding to amounts included in an electing contributor's income under paragraph 94(16)(a).

New paragraph 94(16)(g) is an anti-avoidance rule that prevents the definition "joint contributor" from applying in certain circumstances. If an electing contributor makes a contribution to a trust as part of a series of transactions or events in respect of which another person has made the same contribution (e.g., because of the extended transfer or contribution rules in subsection 94(2)), and one of the main purposes of the series of the transactions was to obtain a specified tax benefit, the contributor and the other person are not treated as joint contributors in applying the rules in paragraph 94(16)(a) to (g) to them. In effect, the income amount computed in respect of each of the other joint contributors' amounts in respect of the contribution will be based on subparagraph (i) of A of the formula in paragraph 94(16)(a), and the resulting income inclusion will be higher than otherwise determined. For this purpose, a specified tax benefit means a benefit from any deduction in computing income, taxable income or tax payable under the Act or any balance of undeducted outlays, expenses or other amounts available to the other person or any exemption available to the other person from tax payable under the Act.

Note that in respect of a contribution made by a person who is non-resident at the particular time of the contribution, if the person later becomes resident in Canada within 60 months after the particular time, subsection 94(10) applies to treat the person as having made that contribution at a time other than a non-resident time. As a result, the person will be treated as a connected contributor at the time ("change-in-status time") at which the requirements of paragraph (a) of the definition "connected contributor" cease to be met in respect of the person. That contribution will, as of the change-in-status time, be treated as having become part of the resident portion at the time at which the contribution was made. In these circumstances, and assuming that the trust has existing electing contributors at all relevant times, the portion of the trust's income derived from that contribution and that is required to be included in computing the trust's income for a taxation year that ends before the change-in-status time will not be attributed to any contributor during the time that is before the change-in-status time, but will instead be taxed at the trust level.

New subsection 94(16) applies to taxation years that end after March 4, 2010.

Example 1

Prior to 2011, Canadians have made contributions to a pre-existing non-resident trust totalling $30,000. None of those persons is resident in Canada in 2011. The trust has also received contributions from non-resident persons who have never been resident in Canada totalling $10,000. No distributions are made from the trust during its 2011 taxation year.

Kamil, Prasanna and Chris are long-term residents of Canada. In February 2011, Kamil makes a contribution of $10,000 to the trust and Prasanna makes a contribution of $5,000 to the trust. Both contributions were made in cash. In August 2011, Chris contributes securities that have a total fair market value of $5,000, to the trust. None of Kamil, Prasanna or Chris has previously contributed to trust. None of them takes an interest in the trust in exchange for their contributions.

The trust realizes income of $2,500 and losses of $500 during its 2011 taxation year. All of the income and losses result from the property contributed by the current and former residents of Canada. The $10,000 of property contributed by persons who have never been resident in Canada did not result in any income or losses during the 2011 taxation year.

Kamil and Prasanna do not elect to be "electing contributors" in respect of the trust. Chris elects to be an "electing contributor" in respect of the trust.

Results

1. The "resident portion" of the trust for its 2011 taxation year will total $50,000. This consists of the $30,000 of pre-2011 contributions from the former residents of Canada and the $20,000 total contributions from Kamil, Prasanna and Chris during 2011. The "non-resident portion" of the trust for its 2011 taxation year will total $10,000.

2. Since Chris is an "electing contributor" in respect of the trust, he is required to include an amount in income in respect of the contribution of securities for his taxation year in which the trust's 2011 taxation year ends. Applying the formula in paragraph 94(16)(a), he will be attributed $200 to be included in income as follows:

($5,000 / $50,000) x ($2,500 - $500) = $200

3. Under paragraph 94(16)(f), the trust will be permitted a $200 deduction in computing its income for its 2011 taxation year.

4. Since Kamil and Prasanna do not elect to be "electing contributors" in respect of the trust, they will be jointly, severally and solidarily liable with the trust for the Canadian income tax liability on its remaining income of $1,800 for its 2011 taxation year (as will any beneficiaries of the trust who are resident in Canada).

5. Note that the "non-resident portion" of the trust is not involved in these computations. In other words, the results described above would be obtained even if the trust did realize income or losses resulting from the $10,000 of property contributed by the non-resident persons who have never been resident in Canada.

Example 2

Assume the same facts as in Example 1 except that the trust's income for the year before any deduction under subsection 104(6) or paragraph 94(16)(f) is $50,000 and that the trust has non-capital losses of other years totalling $15,000 and net capital losses of other years totalling $10,000, which are available to be deducted by the trust in computing its taxable income for 2011. In addition, the trust has made $20,000 of its income payable to its beneficiaries.

Results

1. The "resident portion" of the trust for its 2011 taxation year will total $50,000. This consists of the $30,000 of pre-2011 contributions from the former residents of Canada and the $20,000 total contributions from Kamil, Prasanna and Chris during 2011. The "non-resident portion" of the trust for its 2011 taxation year will total $10,000.

2. The trust's income for 2011(computed without reference to paragraph 94(16)(f)) is $50,000 less the $20,000 payable to the beneficiaries of the trust, or $30,000. The trust decides to deduct $10,000 of its non-capital losses of other years and $10,000 of its net capital losses of other years. After the application of its losses to 2011, the trust will have $5,000 in non-capital losses of other years available to be applied to future years.

3. Since Chris is an "electing contributor" in respect of the trust, he is required to include an amount in income for his taxation year in which the trust's 2011 taxation year ends. Applying the formula in paragraph 94(16)(a), he will be required to include $1,000 in income as income from property from a source in Canada as follows:

($5,000 / $50,000) x ($30,000 - $20,000) = $1,000

4. Under paragraph 94(16)(f), the trust will be permitted to deduct $1,000 in computing its income for its 2011 taxation year. As a result, its net income will be $29,000 ($50,000 -$20,000 - $1,000 (taking into account the $20,000 payable to its beneficiaries)) and its taxable income will be $9,000 ($29,000 - $20,000 (taking into account the $20,000 of total losses deducted by it)) for 2011. Kamil and Prasanna will be jointly, severally and solidarily liable with the trust for its income tax liability on that income.

5. Note that if the trust had made an election under subsection 104(13.1) in respect of the $20,000 of income payable to its beneficiaries, the amount to be included in Chris' income would have been $3,000 ($5,000 / $50,000) x ($50,000 - $20,000)), and the taxable income of the trust would have been $27,000 ($47,000 - $20,000).

Example 3

Luke and Marie are long-term residents of Canada and in 2004 each contributed $10,000 to a trust for the benefit of their adult children, Karen and Paul. There are no other beneficiaries under the trust. Karen lives in Canada and Paul lives in Country X. The trust is considered to be resident in Country X, a country with which Canada does not have a tax treaty. David, who is unrelated to Luke and Marie and their children, ceased to be resident in Canada on May 15, 2004 and made a $10,000 contribution to the trust on May 17, 2004. Marie elects to be an "electing contributor" in respect of the trust, but Luke does not.

The trust realizes $10,000 in income from property during its 2011 taxation year, of which $2,000 was earned in Country Y, $4,000 was earned in Country X, and the remainder was earned in Canada. The trust distributes $2,000 to each beneficiary. The terms of the trust are silent on the source of income to be distributed to the beneficiaries. The trust does not have any losses to apply during its 2011 taxation year.

Country Y imposes tax of 25% on the $2,000 earned in Country Y such that the trust pays $500 in tax to Country Y. Country X imposes tax on all of the trust's income at a rate of 30%, but allows a foreign tax credit for tax payable to another country to a maximum of 15% such that the trust pays $2,100 in tax to Country X (30% x $10,000 - 15% x $6,000). Although the tax payable to Canada and Country Y exceeds 15% of the income earned in each of those countries, Country X limits the foreign tax credit to 15%.

Results

1. All of the trust's property, including the $10,000 of income realized during its 2011 taxation year, is included in its "resident portion" as all contributions were made by either resident contributors or connected contributors.

2. Under new paragraph 94(16)(a), Marie is required to include an amount in her 2011 income computed according to the formula

A/B (C - D)

where

A   is the total of each of Marie's contributions, or $10,000 in this example.

B   is the total of all amounts each of which is the amount that would be determined under A for each resident contributor, or connected contributor, to the trust at the specified time if all of those contributors were electing contributors in respect of the trust, or $30,000 in this example.

C   is the trust's income for the year computed without reference to paragraph 94(16)(f), or $6,000 ($10,000 - $4,000) in this example.

D is the amount of net capital loss or non-capital loss of the trust applied in the year, or nil in this example.

As a result, Marie is required to include $2,000 ($10,000 / $30,000 x $6,000) in her income for 2011, and the trust is entitled to a deduction for that $2,000 under new paragraph 94(16)(f).

3. Under new paragraph 94(16)(c), the trust may designate an amount, in respect of Marie, not exceeding the lesser of its income from a source in a country other than Canada ($6,000) and the amount that may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust) to be part of the amount included in Marie's income because of new paragraph 94(16)(a) ($2,000).

Note that the amount designated in respect of Marie reduces the amount that can be designated in respect of Karen under subsection 104(22). Alternatively, an amount designated in respect of Karen would reduce the amount that could be designated in respect of Marie.

Assuming that the trust makes a designation of $2,000 in respect of Marie under new paragraph 94(16)(c), in addition to any non-business-income tax otherwise paid by Marie, Marie is, under paragraph 94(16)(d), deemed to have paid non-business-income tax equal to the amount determined by the formula

A × B/C

where

A is the total non-business-income tax of the trust for its 2011 taxation year paid to a country other than Canada computed without reference to new paragraph 94(16)(e), or the $2,600 in total paid to Countries Y and X in this example.

B is the amount designated in respect of Marie, or $2,000 in this example.

C is the amount of the trust's income from property sourced in Country X, or $6,000 in this example. Note that new paragraph 94(3)(b)(iii)(A) deems the income from Country Y to be from Country X and not from any other source.

As a result, Marie is deemed to have paid $866.67 in non-business-income tax under new paragraph 94(16)(d).

4. In conjunction with the designation in respect of Marie under new paragraph 94(16)(d), new paragraph 94(16)(e) operates to reduce the trust's income from Country X for 2011 by the amount designated in respect of Marie, and to reduce the amount of non-business-income tax paid by the trust for 2011 by the amount deemed to have been paid by Marie. As a result of the application of new paragraph 94(16)(e), the maximum amount of foreign income from a source other than Canada that can be designated for the year in respect of any beneficiary under subsection 104(22) is limited to the trust's income from that source less any amount designated to an electing contributor. Similarly, the amount of foreign tax paid by the trust for the year that can be designated to a beneficiary under subsection 104(22.1) is limited to the foreign tax paid by the trust less the amount that is deemed to have been paid by an electing contributor.

5. In this example, the trust would be able to designate an amount under subsection 104(22) not exceeding the lesser of the amount of the trust's foreign income ($4,000) and the amount of income paid to Karen out of the income of the trust as income from Country X ($2,000). Since Paul is not resident in Canada such that no amount will be included in his income for the year under subsection 104(13) or (14), no designation can be made to him. Assuming the trust designates $2,000 of its income from Country X in respect of Karen, she will be deemed to have paid $866.67 ($1,733.33 x $2,000 / $4,000) in non-business-income tax for the purposes of computing her foreign tax credit.

6. As a result of the designations of $2,000 of its foreign income to Marie under paragraph 94(16)(e), and $2,000 to Karen under subsection 104(22), the trust has foreign income of $2,000 ($6,000 - $2,000 - $2,000) and foreign tax paid of $1,033.33 ($2,600 - $866.67 - $866.67) to use in computing its own foreign tax credit under section 126 (or alternatively, as a deduction under subsection 20(12)).

Liability for Joint Contribution

ITA
94(17)

New subsection 94(17) applies where there is an electing contributor (as defined in new subsection 94(1)) in respect of a trust who is a joint contributor (as defined in new subsection 94(1)) in respect of a contribution to the trust. Subject to the limits in paragraph 94(17)(b), paragraph 94(17)(a) provides that each joint contributor (as defined in new subsection 94(1)) in respect of the contribution has jointly, severally and solidarily with each other person who is a joint contributor in respect of the contribution, the rights and obligations under Divisions I and J of the Act of each other joint contributor for the taxation years of each other joint contributor in which the trust's taxation year ends. Note that paragraph 94(17)(a) will apply irrespective of whether a particular joint contributor is an electing contributor. Paragraph 94(17)(a) also provides that a "joint contributor" is subject to Part XV of the Act in respect of the rights and obligations mentioned above. For more information on the definitions "electing contributor" and "joint contributor" in subsection 94(1), see the commentary on those definitions. For more detail on the expression "solidarily", please refer to the introductory commentary above on new section 94.

Paragraph 94(17)(b) is a recovery limit rule in respect of amounts otherwise recoverable from a particular person in respect of another person's liabilities under the provisions referred to in paragraph 94(17)(a). The recovery amount is limited to the amount of tax, interest and penalties payable by the other person in respect of amounts arising from a contribution in respect of which the two persons are both joint contributors. The amount recoverable is further reduced by amounts already recovered in respect of those liabilities.

New subsection 94(17) applies to taxation years that end after March 4, 2010.

Example 1: Liability for Joint Contributions

Assume that the securities transferred by Chris to the trust in Example 1 above describing the application of subsection 94(16) were acquired by him from Kelly, a resident of Canada, as part of a series of transactions by which Kelly's securities would be transferred to the trust. The facts are otherwise the same as set out in Example 1 above, and are restated as follows.

Prior to 2011, Canadians have made contributions to a pre-existing non-resident trust totalling $30,000. None of those persons is resident in Canada in 2011. The trust has also received contributions from non-resident persons who have never been resident in Canada totalling $10,000. No distributions are made from the trust during its 2011 taxation year.

Kamil and Prasanna are long-term residents of Canada. In February 2011, Kamil makes a contribution of $10,000 to the trust and Prasanna makes a contribution of $5,000 to the trust. Chris and Kelly are also long-term residents of Canada. In June 2011, Kelly transfers securities to Chris. In August 2011, Chris contributes those same securities to the trust as part of a series of transactions that includes the transfer of Kelly's securities to Chris. The total fair market value of the securities at the time of their transfer to the trust is $5,000. None of Kamil, Prasanna, Chris or Kelly has previously contributed to trust. None of them takes an interest in the trust in exchange for their contributions.

The trust realizes income of $2,500 and losses of $500 during its 2011 taxation year. All of the income and losses result from the property contributed by the current and former residents of Canada. The $10,000 of property contributed by persons who have never been resident in Canada did not result in any income or losses during the 2011 taxation year.

Kamil and Prasanna do not elect to be "electing contributors" in respect of the trust. Chris and Kelly do elect to be "electing contributors" in respect of the trust.

Results

1. The "resident portion" of the trust for its 2011 taxation year will total $50,000. This consists of the $30,000 of pre-2011 contributions from the former residents of Canada and the $20,000 total contributions from Kamil, Prasanna, Chris and Kelly during 2011. The "non-resident portion" of the trust for its 2011 taxation year will total $10,000.

2. Kelly is deemed to have made a contribution to the trust of $5,000 by reason of paragraph (b) of the definition "contribution". As Chris and Kelly are both deemed to have made a contribution to the trust, they may both elect to be an "electing contributor" in respect of the trust.

3. For the purpose of computing the amount of income to be attributed to each of Chris and Kelly, they are each deemed to have made a contribution of $2,500 by reason of subparagraph (ii) of the description of A in paragraph 94(16)(a). Note that if Chris had also made a separate contribution to the trust of $10,000, such that his total contributions to the trust would have been $15,000, for the purpose of computing the amount of income to be attributed to him, the amount determined for him under A of the formula in subsection 94(16) would be $12,500.

4. Since Chris and Kelly have elected to be "electing contributors" in respect of the trust, they are each required to include an amount in income in respect of the contribution of securities for their taxation years in which the trust's 2011 taxation year ends. Applying the formula in paragraph 94(16)(a), they will each be attributed $100 to be included in income as follows:

($2,500 / $50,000) x ($2,500 - $500) = $100

5. Under paragraph 94(16)(f), the trust will be permitted a $200 deduction in computing its income for its 2011 taxation year reflecting the amounts attributed to Chris and Kelly as electing contributors (2 x $100).

6. Since Kamil and Prasanna do not elect to be "electing contributors" in respect of the trust, they will be jointly, severally and solidarily liable with the trust for the Canadian income tax liability on its remaining income of $1,800 for its 2011 taxation year (as will any beneficiaries of the trust who are resident in Canada).

7. Since Kelly has jointly and severally, or solidarily, the same obligations under Divisions I and J as Chris in respect of the contribution of securities to the trust (and vice versa), if Chris is not able to pay the tax on the $100 included in his income as required under the Act, or does not do so, Kelly may be called upon to pay the tax, interest and penalties that would otherwise be paid by Chris, but only to the extent provided in paragraph 94(17)(b). Assume that Chris' tax payable for 2011 is $15,000, but that he computes his tax payable without regard to the $100 income inclusion such that he only pays $14,950. Further assume that he refuses to pay the additional $50 and that $5 in interest has accrued on the amount of his outstanding tax payable for 2011. Under new subsection 160(2.1), the Minister may issue Kelly a notice of assessment in respect of the $50 tax and the $5 in interest. If either Chris or Kelly subsequently pays the full amount owing, the liability of each is extinguished. See the commentary under new subsection 160(2.1) for further details.

Example 2

Adding to the facts of Example 1 above, assume that instead of transferring the securities to Chris, Kelly had transferred the securities to a Canadian corporation, Corporation A, which then transferred the securities to the trust. Assume further that Corporation A had significant losses of other years available to be applied against its 2011 income. In addition, assume that the total of the trust's income for 2011 is $5,000,000 instead of $2,500. Lastly, assume that the trust has no losses to apply in 2011. The facts are otherwise the same as set out in the example above.

Results

1. The "resident portion" of the trust for its 2011 taxation year will total $50,000 and the "non-resident portion" of the trust for its 2011 taxation year will total $10,000 as in the previous example.

2. Kelly and Corporation A are each deemed to have made a contribution to the trust of $5,000 in respect of Corporation A's transfer of the securities to the trust. As Corporation A and Kelly are both deemed to have made a contribution to the trust, they may both elect to be an "electing contributor" to the trust.

3. Provided that paragraph 94(16)(g) does not apply, Corporation A and Kelly will each be attributed $250,000 to be included in income as follows:

($2,500 / $50,000) x $5,000,000 = $ 250,000

Corporation A applies its losses of other years to reduce its taxable income for 2011 such that it has no tax payable for 2011. Kelly includes $250,000 in income for 2011 and pays the resulting tax on that amount. However, if it can reasonably be considered that one of the main purposes of transferring the securities to Corporation A, instead of directly to the trust, was to allow Corporation A to apply its losses against a portion of the amount that would otherwise have been included in Kelly's income, paragraph 94(16)(g) will deem Corporation A to not be a contributor to the trust for the purpose of computing the amount to be attributed to electing contributors. As a result, Kelly would include the full $500,000 in income, instead of only $250,000.

Clause 7

Offshore Investment Fund Property and Foreign Investment Entities

ITA
94.1

Section 94.1 of the Act contains an anti-avoidance provision relating to investors in offshore investment funds. This provision applies where a taxpayer invests in an offshore investment fund and one of the main reasons for the investment is to reduce or defer the tax liability that would have applied to the income generated from the underlying assets of the fund if such income had been earned directly by the taxpayer. In these circumstances, section 94.1 requires an amount to be included in computing the taxpayer's income in respect of the investment. This amount is determined, in general terms, by multiplying the cost amount of the taxpayer's investment (more precisely, the "designated cost" of the investment, as defined in subsection 94.1(2) of the Act) by a factor based on interest rates prescribed under Part XLIII of the Regulations.

ITA
94.1(1)

Subsection 94.1(1) of the Act sets out the rules for determining whether an amount is to be included in a taxpayer's income for the year, and if so, the rules for computing that amount, in respect of an interest in an offshore investment fund property.

Paragraph 94.1(1)(a) of the Act describes the types of interests in non-resident entities that are subject to the provision, and expressly excludes an interest in a controlled foreign affiliate of a taxpayer and an interest in a prescribed non-resident entity. Paragraph 94.1(1)(a) is amended to add to the list of excluded non-resident entities a trust to which section 94.2 applies in respect of the taxpayer. As a result, if section 94.2 applies to treat the trust as a controlled foreign affiliate of the taxpayer for a taxation year, the taxpayer will not be required to include an amount in income under subsection 94.1(1) of the Act.

Where subsection 94.1(1) applies to a taxpayer for a taxation year, paragraphs 94.1(1)(f) and (g) of the Act determine the amount required to be included in computing the taxpayer's income for the year under that subsection. Paragraph 94.1(1)(f) is amended so that the interest factor used in computing the income inclusion under that subsection is the interest rate prescribed under Part XLIII of the Regulations for the relevant period plus 2%.

These amendments apply to taxation years that end after March 4, 2010. The amendment to paragraph 94.1(1)(a) also applies to each taxation year of a beneficiary under a trust that ends before March 5, 2010 if new subsection 94(3) of the Act applies to the trust (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) for a taxation year that ends in that earlier taxation year of the beneficiary.

ITA
94.1(2)

Subsection 94.1(2) of the Act contains definitions, including the definition "non-resident entity", that apply for the purposes of section 94.1 of the Act. The definition "non-resident entity" is amended to exclude certain "exempt foreign trusts", as defined in subsection 94(1) of the Act, from being non-resident entities for purposes of section 94.1. Specifically, a reference in section 94.1 to a "non-resident entity" will not include a trust that is, at the relevant time, an exempt foreign trust under any of paragraphs (a) to (g) of the definition "exempt foreign trust" in subsection 94(1). A trust that is, at the relevant time, an exempt foreign trust under paragraph (h) of that definition will be a non-resident entity for purposes of section 94.1. Also excluded from a "non-resident entity" will be a trust in respect of which there are no resident contributors, including an "immigration trust" of which every contributor who is resident in Canada has not been resident in Canada for a period or periods of time the total of which is less than 60 months at the end of a taxation year. As noted above under the commentary on subsection 94(3), a non-resident entity will not include a trust that is deemed to be resident in Canada.

This amendment applies to taxation years that end after March 4, 2010. The amendment also applies to each taxation year of a beneficiary under a trust that ends before March 5, 2010 if new subsection 94(3) of the Act applies to the trust (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) for a taxation year that ends in that earlier taxation year of the beneficiary.

Transitional rules

The coming-into-force provisions for the amendments to section 94.1 also provide rules for determining the income tax treatment of a taxpayer who voluntarily complied with earlier proposed amendments (the "outstanding proposals") tabled during the second session of the 39th Parliament and which were not enacted before Parliament dissolved in September 2008. Budget 2010 announced that the Government would not be proceeding with the outstanding proposals. However, a taxpayer who voluntarily complied with the outstanding proposals in previous years will have the option of requesting to have those years reassessed by the CRA. Such a request must be made to the Minister of National Revenue on or before the day that is 365 days after the transitional rules receive Royal Assent.

If a taxpayer who voluntarily complied with the outstanding proposals in previous years does not wish to be reassessed for those years, and had more income than would have been the case under the existing rules, the taxpayer will have the option of taking a deduction for the excess income. Under such an option, the tax assessed on income from all foreign investment entities held by the taxpayer for the period 2001 to 2008 would be deemed to be the amount of tax required to be remitted under the Act (provided the taxpayer made a reasonable effort to compute that income in accordance with the outstanding proposals), and the taxpayer would be allowed a deduction for the amount, if any, by which the amounts included in income in respect of those investments for those years was in excess of the amount that would otherwise have been included in income in respect of those investments for those years. The deduction must be claimed by the taxpayer in computing the taxpayer's income for the first taxation year that ends after the last taxation year of the taxpayer that ends before March 4, 2010.

Note that the election is not intended to override the CRA's role in enforcing compliance with the provisions of the Act. For example, the election would not prevent the CRA from reassessing a particular tax return where the taxpayer failed to report an amount of income required by section 94.1 of the Act.

If a taxpayer voluntarily complied with the outstanding proposals in previous years in respect of a participating interest, and included less in income than would have been the case under the existing rules, the excess is not required to be included in income. Instead, the taxpayer will be required to deduct an amount in computing the adjusted cost base of those participating interests held after the start of the taxpayer's first taxation year that ends after March 4, 2010. The deduction amount is the amount by which the deductions reported by the taxpayer under the outstanding proposals exceed the income inclusions reported by the taxpayer under the outstanding proposals.

The following examples illustrate the application of these transitional rules.

Example 1

Ms. Brown has, continuously since 2004, held interests in three foreign investments (X, Y and Z). Investment X is property that is an offshore investment fund property in respect of which section 94.1 requires Ms. Brown to include an amount in income. Investment Y consists of shares of a foreign corporation that is not a foreign affiliate of Ms. Brown and not an offshore investment fund property. Investment Z is a fixed interest in a non-resident trust, the fair market value of which represents 15% of the total fair market value of all interests in that trust. Under the rules applicable for 2004 to 2009, Ms. Brown was required to include the following amounts in income, as applicable, for the relevant taxation years: for investment X, an amount computed with reference to the designated cost of investment X and the prescribed rate for the year under section 94.1; for investment Y, the total of all dividends received from the corporation; and for investment Z, the amount determined under section 91 acting in operation with paragraph 94(1)(d) of the Income Tax Act. However, Ms. Brown instead made reasonable efforts to compute, and include in income amounts on the basis that each of the three investments was a participating interest (and not an exempt interest) in a foreign investment entity as defined in the outstanding proposals.

A summary of amounts required to be included in Ms. Brown's income and the amounts actually included in her income is as follows:

Taxation Year Actual amount included in income Required inclusion amount Net Difference
2004 $1,000 $50 $950
2005 1,000 53 947
2006 <5,000> 1,000 <6,000>
2007 4,000 55 3,945
2008 2,000 60 1,940
 


Total $3,000 $1,218 $1,782

In the result, Ms. Brown has the choice of amending her previously filed returns to reflect the correct amount of tax payable for each year, or she may choose to have her tax payable for those years computed as if the amounts that she actually included in income in respect of investments X, Y and Z resulted in the proper amount of tax payable for those years and claim the $1,782 difference as a deduction in computing her income for 2010. In the event that Ms. Brown's circumstances are such that the deduction of $1,782 is in excess of her income, the $1,782will form part of her non-capital loss for 2010. Any errors and omissions made by Ms Brown for the taxation years 2004 to 2008 that do not relate to her investments in X, Y and Z are subject to normal reassessment procedures.  

Adjusted Cost Base Adjustments

If Ms. Brown chooses to amend her previously filed returns to reflect the amount of tax payable for each year as determined under the rules applicable to those years, the cost base of her investments will be adjusted by the income inclusions required for each year. If Ms. Brown elects to have her tax payable for those years computed as if the amounts that she included in income in respect of those investments resulted in the proper amount of tax payable for those years and claim the difference as a deduction in computing her income for 2010, the cost base of her investments will be adjusted for the actual amount of income inclusions and deductions claimed (as such amounts will be deemed to be the amounts required to be included in income or deducted for those years). In addition, the cost base of her investments will also be adjusted for the deduction claimed in 2010. As a result, in either case (in other words, whether she chooses to have her previous returns assessed, or elects to have her tax payable for those years computed as if the amounts that she included in income in respect of those investments resulted in the proper amount of tax payable for those years and claims the deduction in 2010), the adjusted cost base of her investments will be the same after taking into account the ACB adjustment for the deduction in 2010.

Example 2

Mr. Brown has, continuously since 2004, held interests in three foreign investments (X, Y and Z). Investment X is property that is an offshore investment fund property in respect of which section 94.1 requires Mr. Brown to include an amount in income. Investment Y consists of shares of a foreign corporation that is not a foreign affiliate of Mr. Brown and not an offshore investment fund property. Investment Z is a fixed interest in a non-resident trust, the fair market value of which represents 15% of the total fair market value of all interests in that trust. Under the rules applicable for 2004 to 2008, Mr. Brown was required to include the following amounts in income, as applicable, for the relevant taxation years: for investment X, an amount computed with reference to the designated cost of investment X and the prescribed rate for the year under section 94.1; for investment Y, the total of all dividends received from the corporation; and for investment Z, the amount determined under section 91 acting in operation with paragraph 94(1)(d) of the Income Tax Act. However, Mr. Brown instead included amounts in income on the basis that each of the three investments was a participating interest (and not an exempt interest) in a foreign investment entity as defined in the outstanding proposals.

A summary of amounts required to be included in Mr. Brown's income and the amounts actually included in his income is as follows:

Taxation Year Actual amount included in income Required inclusion amount Net Difference
2004 <$1,000> $50 $950
2005 1,000 53 947
2006 <5,000> 1,000 <6,000>
2007 <4,000> 55 <4,055>
2008 2,000 60 1,940
Total <$5,000> 1,218 <$6,218>

In the result, Mr. Brown has the choice of amending his previously filed returns to reflect the correct amount of tax payable for each year, or he may elect to have his tax payable for those years computed as if the amounts that he included in income in respect of investments X, Y and Z resulted in the proper amount of tax payable for those year. He is not required to include the $6,218 difference in income in 2010. However, Mr. Brown will be required to reduce the adjusted cost base of any of those investments in which the amount of the reported deduction for the relevant period exceeds the amount of the reported inclusion for the relevant period. For example, assume that the losses in 2006 and 2007 arose as a result of mark-to-market losses under the outstanding proposals for investment X. Assume also that the total of all reported deductions for investment X during the relevant period exceeds the total of all reported inclusions for investment X during the relevant period. Since Mr. Brown still holds investment X at the beginning of the first taxation year that ends after the relevant period and the net amount included in income from his investments that would be participating interests (and not an exempt interest) in a foreign investment entity as defined in the outstanding proposals for the relevent period is less than the amount that would have been included in income under the law in force during that period, Mr. Brown is required to reduce the adjusted cost base of his investment in investment X by the amount of such excess. As in the first example, any errors and omissions made by Mr. Brown for the taxation years 2004 to 2008 that do not relate to his investments in X, Y and Z are subject to normal reassessment procedures.

Clause 8

Investments in Non-resident Commercial Trusts

ITA
94.2

New section 94.2 of the Act sets out rules regarding a taxpayer's interest in a non-resident trust that is an exempt foreign trust under paragraph (h) of the definition "exempt foreign trust" in new subsection 94(1) of the Act.

Specifically, subsection 94.2(1) provides that the trust be treated for purposes of subsections 91(1) to (4) and sections 94 and 233.4 as a controlled foreign affiliate (CFA) of the taxpayer if the taxpayer is a resident beneficiary under the trust that holds a "specified fixed interest" (as defined in new subsection 94(1)) in the trust, and the taxpayer either has contributed "restricted property" (as defined in new subsection 94(1)) to the trust or holds specified fixed interests that (together with the interests of certain other persons) represent at least 10% of the total fair market value of all specified fixed interests in the trust. As a result, the taxpayer will be required to include in computing their income an amount as required by section 91 of the Act. For this purpose, the following additional rules apply:

  • subsection 94.2(2) deems the taxpayer to own shares of the capital stock of the CFA and provides rules for determining the taxpayer's participating percentage of those shares;
  • subsection 94.2(3) allows the taxpayer an offsetting deduction to the extent that a source of income to the trust that is included in the trust's foreign accrual property income ("FAPI") for a year is also included in the part of the trust's income for that year that is included in the taxpayer's income under subsection 104(13) – in these circumstances, the taxpayer may reduce the taxpayer's subsection 91(1) income inclusion (otherwise determined) by the amount determined under subsection 94.2(3); and
  • the Minister may demand additional information from the taxpayer to determine the fair market value of interests in the trust and, if the information is not received in a timely manner, the fair market value of the interests is deemed to be the fair market value as reasonably determined by the Minister having regard to certain available information.

Unlike the income computation of a taxpayer holding shares in a foreign corporation where the income inclusion is computed on a share by share basis, the amount to be included in the income of a taxpayer holding an interest in a foreign trust is based on the taxpayer's participating percentage in the trust, aggregating all of the taxpayer's interests in the trust. This difference is required because not all interests in a trust are segregated into separate securities (i.e., units or "shares").

Subsection 94.2(1) also applies for the purpose of section 233.4 of the Act, thus ensuring that the reporting requirements in respect of foreign affiliates apply in respect of non-resident trusts that are foreign affiliates because of section 94.2.

Section 94.2 will not apply to a Canadian resident beneficiary under a trust – even where all interests in the trust are specified fixed interests – where there is no connected contributor to the trust (i.e., in which circumstances the beneficiary would not be a "resident beneficiary").

The definitions in subsection 94(1), and the application rules in subsection 94(2), of the Act apply for purposes of section 94.2. Of particular note are the definitions "beneficiary", "contribution", "exempt foreign trust", "resident beneficiary", "restricted property" and "specified fixed interest", and the extended contribution rules in paragraphs 94(2)(c) and (n) to (u).

New section 94.2 of the Act applies to taxation years that end after March 4, 2010. However, if new subsection 94(3) of the Act applies to a trust (either because of the general application of that provision for the 2007 to 2010 taxation years, or because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) for a taxation year that ends before March 5, 2010, section 94.2 will apply – by preserving as a transitional section 94.2 the contents of previously enacted paragraphs 94(1)(a), (b) and (d) and subsection 94(4) – to each beneficiary under the trust for a taxation year of the beneficiary in which that earlier taxation year of the trust ends.

Clause 9

Trusts and their Beneficiaries

ITA
104

Section 104 of the Act provides rules governing the tax treatment of trusts and their beneficiaries.

ITA
104(6)

Subsection 104(6) generally permits a trust to deduct, in computing its income for a taxation year, an amount not exceeding the portion of its income otherwise determined for the year that becomes payable in the year to a beneficiary under the trust. Subsection 104(6) is amended so that it is expressly subject to subsections 104(7) to 104(7.1).

This amendment applies to taxation years that end after 2006. It also applies to each earlier taxation year of a trust to which subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) and each taxation year of a beneficiary under the trust in which one of those earlier taxation years of the trust ends.

ITA
104(7.01)

Subsection 104(6) generally permits a trust to deduct, in computing income for a taxation year, an amount not exceeding the portion of its income for the year that becomes payable in the year to a beneficiary under the trust. Because of subsection 104(24), trust income is deemed not to have become payable in the year to a beneficiary unless it is paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount.

New subsection 104(7.01) of the Act restricts the amount that a trust, that is deemed by subsection 94(3) to be resident in Canada (referred to in this commentary as a "subsection 94(3) trust"), can deduct under subsection 104(6) in computing its income in the event that the trust has Canadian-source income and makes distributions to beneficiaries not resident in Canada.

In effect, subsection 104(7.01) acts as a proxy for taxes under Parts XII.2 and XIII of the Act in connection with Canadian-source income earned by a subsection 94(3) trust that has become payable by the trust to its non-resident beneficiaries.

New subsection 94(3) deems a trust to which it applies to be resident in Canada for certain purposes, not including Part XII.2. Accordingly, a trust that is resident in Canada solely because of the deeming provision in subsection 94(3) would generally be non-resident for purposes of Part XII.2. Because of an existing exemption for non-resident trusts in Part XII.2, the tax under that Part does not apply to such a trust. (A subsection 94(3) trust remains a non-resident also for purposes of determining whether any other trust is liable to tax under Part XII.2 in respect of distributions to the subsection 94(3) trust.)

A subsection 94(3) trust is also exempt from Part XIII withholding obligations on Canadian-source income earned by it that becomes payable by it in the year to non-resident persons.

However, to ensure that subsection 94(3) trusts are not inappropriately used to distribute Canadian-source income free of tax to non-resident beneficiaries, subsection 104(7.01) limits the amount of any trust deduction under subsection 104(6) for such distributions, thereby ensuring the income is subject to Part I tax in the trust.

It should also be noted that persons that pay or credit an amount to a subsection 94(3) trust are still subject to a withholding obligation under section 215 of the Act notwithstanding that the trust itself is exempt from Part XIII tax. This is because new paragraph 94(4)(c) provides that the deemed Canadian residence under subsection 94(3) does not apply for the purposes of determining withholding obligations under section 215.  The CRA will hold the withholding taxes paid and, as required by paragraph 94(3)(g) of the Act, apply them on account of the trust's Part I tax liability, but only to the extent the amount on which Part XIII tax is paid is an amount included in the trust's income. The existing provisions of the Act do not expressly give a Part XIII exemption in this regard to trusts that are subject to existing subsection 94(1). Instead, existing subparagraph 94(1)(c)(ii) allows a tax credit to be claimed by those trusts under section 126 in connection with Part XIII tax on payments made to those trusts.

As mentioned above, subsection 104(7.01) reduces the maximum deduction under subsection 104(6). More specifically, the amount by which the maximum deduction under subsection 104(6) for a taxation year is reduced under subsection 104(7.01) is equal to the total of:

  • the portion of the trust's "designated income" for the year (as defined in Part XII.2) that became payable in the year to a non-resident beneficiary (including another subsection 94(3) trust) under the trust in respect of an interest of the non-resident as a beneficiary under the trust, and

all amounts each of which is the product obtained by multiplying a specified factor by each particular amount that is paid or credited in the year to the trust that would, disregarding express provisions to the contrary in the Act, be subject to Part XIII tax and that is payable in the year to a non-resident beneficiary (including another subsection 94(3) trust) under the trust in respect of an interest of the non-resident as a beneficiary under the trust.

The specified factor in respect of each particular amount described in the second paragraph above is 0.35, if the trust can establish to the satisfaction of the Minister of National Revenue that the non-resident beneficiary to whom the particular amount is payable is resident in a country with which Canada has a tax treaty under which the income tax that Canada may impose on the beneficiary in respect of the amount is limited. In any other case, the specified factor is 0.6.

This amendment applies to taxation years that end after 2006. It also applies to each earlier taxation year of a trust to which subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) and each taxation year of a beneficiary under the trust in which one of those earlier taxation years of the trust ends.

The example below illustrates the operation of new subsection 104(7.01).

Example

Trust X is an offshore trust established by Stefan, a long-term resident of Canada. The primary beneficiaries under the trust are Linda (a resident of Canada), Tim (a resident of non‑Treatyland) and Bart (a resident of the United States).

Trust X receives $1,600 of income in its 2007 taxation year. This income consists of $400 of taxable dividends received from a taxable Canadian corporation. The remaining $1,200 of income is from other sources, none of which is "designated income" (as defined in Part XII.2) of the trust.

$1,050 of Trust X's income for 2007 is made payable in the year to Bart. Of this amount, $100 represents the taxable dividends. Trust X makes payable $200 of its income to Tim. Of this amount, $200 represents the taxable dividends. The remaining $350 of the trust's income is made payable in the year to Linda. Of this amount, $100 represents the taxable dividends.

Trust X is assumed to have designated the $400 of taxable dividends under subsection 104(19). (Where a designation under subsection 104(19) is available and the designation is made, the designated portion of the dividend income of the trust will, for the purposes of the Act (other than Part XIII), maintain its character, as dividend income, in the hands of the beneficiary.)

Results

1. Because Trust X has a resident contributor at the end of its 2007 taxation year, the trust is deemed by new subsection 94(3) to be resident in Canada for the purposes of computing its income.

2. Before taking into account any deduction under subsection 104(6), Trust X's income is $1,600. Note that the $400 in dividends is included in computing the trust's income.

3. Before taking into account new subsection 104(7.01), the maximum deduction under subsection 104(6) is also $1,600.

4. Because of subsection 104(7.01), the maximum deduction under subsection 104(6) is reduced to $1,445 (i.e., $1,600 minus the total of: nil + ((.60 x $200) and (0.35 x $100))).

5. Assuming that the trust claims a deduction of $1,445 under subsection 104(6), the trust would consequently have income of $155. If a tax rate of 42.92% were assumed (i.e., combined federal rates of 29% (because of subsections 122(1) and 117(2)) and 13.92% (because of subsection 120(1))), the trust would be liable for Canadian income tax of approximately $67. Note that the trust is exempt from having to collect a Part XIII tax in respect of the amounts made payable to Bart and Tim that are referred to in paragraph 104(7.01)(b) in respect of the trust for the particular taxation year, because these are exempt amounts for the purposes of subparagraph 94(3)(a)(ix). In the absence of this exemption, the Part XIII tax that would have had to have been collected by the trust in respect of the amounts made payable to Bart and Tim would have been $65 (i.e., 25% of $200 and 15% of $100), which is approximately equal to the tax that the trust must pay as a result of the application of subsection 104(7.01).

ITA
104(24)

The determination of when an amount becomes payable in a taxation year to a beneficiary under a trust is relevant for a number of purposes, including the determination of the amount deductible under subsection 104(6) of the Act. Under subsection 104(24), an amount is deemed not to have become payable in the year to a beneficiary unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount.

Subsection 104(24) is amended so that it also applies for the purposes of subsection 94(8) and subsection 104(7.01). For more information, see the commentary on those provisions.

This amendment applies to taxation years that end after 2006. It also applies to each earlier taxation year of a trust to which subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) and each taxation year of a beneficiary under the trust in which one of those earlier taxation years of the trust ends.

Clause 10

Application of subsection 75(2)

ITA
107(4.1)(b)

Subsection 107(4.1) of the Act prevents the application of subsection 107(2) of the Act on a distribution of trust property to a beneficiary where, generally, subsection 75(2) was at any time applicable in respect of property of the trust. Subsection 107(4.1) is amended so that the determination of whether subsection 75(2) was at any time applicable in respect of property is made without regard to paragraph 75(3)(c.2) of the Act. Therefore, if subsection 75(2) is otherwise applicable in respect of the property, the property remains such a property for the purposes of subsection 107(4.1) even though the property is one in respect of which an electing contributor will not be attributed income under subsection 75(2).

This amendment applies to distributions after ANNOUNCEMENT DATE.

Clause 11

Trusts

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.

Interests Acquired for Consideration

ITA
108(7)

Subsection 108(7) of the Act contains a rule that, in general terms, provides that a person (or two or more related persons) can make a contribution to a trust and retain an interest under the trust without the interest being considered to have been acquired for consideration. This rule applies for the purposes of paragraph 53(2)(h), subsection 107(1), paragraph (j) of the definition "excluded right or interest" in subsection 128.1(10) and the definition "personal trust" in subsection 248(1).

Subsection 108(7) is amended so that it also applies for the purpose of subparagraph (c)(i) of the definition "exempt amount" in subsection 94(1). For more detail on that definition, see the commentary above.

This amendment applies to taxation years that end after 2006. It also applies to each earlier taxation year of a trust to which subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) and each taxation year of a beneficiary under the trust in which one of those earlier taxation years of the trust ends.

Clause 12

Tax Payable by Inter Vivos Trust

ITA
122(2)(d.1)

Subsection 122(1) of the Act provides that, instead of graduated income tax rates, inter vivos trusts are generally subject to top marginal rates of income tax on their undistributed income. Subsection 122(2), which does not apply to mutual fund trusts, permits graduated income tax rates for certain inter vivos trusts established before June 18, 1971. One of the conditions for an inter vivos trust continuing to qualify for graduated income tax rates is that it not receive any gifts after June 18, 1971.

Paragraph 122(2)(d.1) is introduced so that the graduated income tax rates cease to apply to a trust in the event that, after June 22, 2000, a "contribution" is made to the trust. For this purpose, the expression "contribution" is defined in new section 94. Although the definition "contribution" in new section 94 encompasses more than gifts and loans from arm's length parties, it excludes most arm's length transactions. Generally, a contribution will result in an increase in the value of the trust's assets or a decrease in the trust's liabilities.

This amendment applies to trust taxation years that begin after 2002.

Clause 13

Changes in Residence

ITA
128.1

Section 128.1 sets out the income tax effects of becoming or ceasing to be resident in Canada.

ITA
128.1(1.1)

Subsection 128.1(1) of the Act sets out rules that apply where a taxpayer becomes resident in Canada. Paragraph 128.1(1)(b) treats a taxpayer who becomes resident in Canada as having disposed of the taxpayer's property, with certain exceptions, for proceeds equal to the property's fair market value.

New subsection 128.1(1.1) of the Act identifies a set of circumstances in which paragraph 128.1(1)(b) does not apply to a taxpayer that is a trust.

Under subsection 128.1(1.1), paragraph 128.1(1)(b) will not apply, at a time in a particular taxation year of a trust, to the trust if the trust is resident in Canada because of new paragraph 94(3)(a) for the particular taxation year for the purpose of computing its income.

This rule applies to ensure that a deemed disposition does not occur solely because the basis for a trust's residency in Canada changes from paragraph 94(3)(a) to some other basis (e.g., because the non-resident trustee of a trust is replaced with a Canadian-resident trustee).

For more detail on subsections 94(3) and (4), see the commentary on those provisions.

This amendment applies to trust taxation years that end after 2006. It also applies to each earlier taxation year of a trust to which subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act).

The following chart summarizes the applicable provisions and their effects that apply to a change in the status of a trust that has a resident contributor or a resident beneficiary.

Change in status Applicable Provisions Tax consequences
A trust that is deemed resident under current paragraph 94(1)(c) for 2006 is deemed resident under new subsection 94(3) for 2007. Paragraph 94(4)(d) and transitional paragraph 6(2)(k) of the legislative proposals released on August 27, 2010.   Although paragraph 94(4)(d) provides that a trust that is otherwise deemed resident under subsection 94(3) is not considered resident in Canada for the purpose of applying subsection 128.1(1), the coming-into-force rules in paragraph 6(2)(k) of these proposals suspend the application of paragraph 94(4)(d). As a result, a trust, which is deemed resident for 2006 under paragraph 94(1)(c), and deemed resident for 2007 under new subsection 94(3), will not be subject to the application of either subsections 128.1(1) or (4) as a result of the introduction of these rules. As a result, the trust is not deemed to dispose of any of its property at the end of 2006.
A trust that is non-resident for 2011 is deemed resident by reason of subsection new 94(3) for 2012. Paragraphs 94(3)(c) and 94(4)(d). Paragraph 128.1(1) does not apply at the end of 2011 because of the application of new paragraph 94(4)(d). However, the trust is deemed to have disposed of each of its properties (other than the properties described in subparagraphs 128.1(1)(b)(i) to (iv)) by reason of new paragraph 94(3)(c).
A trust is deemed resident by reason of new subsection 94(3) for 2011. The trustees are replaced with trustees resident in Canada on August 21, 2011. Paragraphs 94(4)(d) and 128.1(1)(a), and subsection 128.1(1.1). As a result of the application of new paragraph 94(4)(d), the conditions in subsection 128.1(1) are met and the trust is deemed to have a taxation year-end immediately before the change in residency. However, new subsection 128.1(1.1) suspends the deemed disposition that would otherwise occur by operation of paragraph 128.1(1)(b).
A trust is resident in Canada for 2011 without regard to new subsection 94(3), but has a resident contributor. The trustees are replaced with non-resident trustees on August 21, 2011. Paragraphs 94(4)(e) and 128.1(4). As a result of the application of new paragraph 94(4)(e), the conditions in subsection 128.1(4) are met. The trust is deemed to have a taxation year-end immediately before the change in residency, and is deemed to have disposed of the properties described in subsection 128.1(4) immediately before the change in residency.
A trust is deemed resident by reason of new subsection 94(3) for 2011. On August 21, 2012, the trust ceases to have any resident contributors or resident beneficiaries. Subsections 94(5) and 128.1(4). Because of the application of new paragraph 94(5), the trust is deemed to have a taxation year-end immediately before it ceases to have any resident contributors or resident beneficiaries. The determination of whether the trust ceases to be resident under subsection 128.1(4) is made without reference to new subsection 94(3) because of the application of paragraph 94(4)(e). However, new subsection 94(5) deems the trust to have ceased to be resident at the earliest time at which there is no resident contributor or resident beneficiary. As a result, paragraph 128.1(4)(b) applies to deem the trust to have disposed of the properties described in subsection 128.1(4) immediately before the change in residency. 
An exempt foreign trust that has a resident contributor ceases to be an exempt foreign trust on August 21, 2011. Subsection 94(6), and paragraphs 94(3)(c) and 94(4)(d). As a result of ceasing to be an exempt foreign trust, new subsection 94(6) applies to deem the trust to have a taxation year-end immediately before its change in status. In addition, new paragraph 94(3)(c) applies to deem the trust to have disposed of each of its properties (other than the properties described in subparagraphs 128.1(1)(b)(i) to (iv)) immediately before it ceases to be an exempt foreign trust. Subsection 128.1(1) does not apply because of the application of new paragraph 94(4)(d).
A non-resident trust that is deemed resident under new subsection 94(3) becomes an exempt foreign trust on August 21, 2011. Subsection 94(6). As a result of becoming an exempt foreign trust, new subsection 94(6) applies to deem the trust to have a taxation year-end immediately before its change in status.

For addition detail on paragraphs 94(3)(c), 94(4)(d) and (e), and subsections 94(5) and (6), see the commentary on those provisions.

Clause 14

Assessment and Reassessment

ITA
152(4)(b)(vii)

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.

Paragraph 152(4)(b) is amended by adding a new subparagraph. New subparagraph 152(4)(b)(vii) allows the Minister of National Revenue to assess or reassess tax within an additional 3 years where the assessment or reassessment is made to give effect to the application of any of sections 94, 94.1 and 94.2 of the Act.

This amendment applies to taxation years that end after March 4, 2010.

Clause 15

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

ITA
160

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

ITA
160(2.1)

New subsection 160(2.1) of the Act allows the Minister of National Revenue to assess a taxpayer at any time in respect of any amount payable because of paragraph 94(3)(d) or (e) or subsection 94(17).  Such an assessment has the same effect as if it had been made under section 152 of the Act and is subject to interest. For more information on paragraphs 94(3)(d) and (e) and subsection 94(17), see the commentary on those provisions.

This amendment applies to assessments made after 2006, except that new subsection 160(2.1) is to be read without reference to subsection 94(17) in its application to taxation years that end before March 5, 2010. Also, if subsection 94(3) of the Act applies to a taxation year of a taxpayer (i.e., a trust, a beneficiary under the trust or a contributor to the trust), because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act, new subsection 160(2.1) applies to assessments made on or after the first day of the first such taxation year of the taxpayer.

Discharge of Liability

ITA
160(3)

Subsection 160(3) of the Act provides that, where a particular taxpayer becomes jointly and severally liable with another taxpayer under subsection 160(1) or (1.1) with respect to a tax liability of the other taxpayer, a payment by the particular taxpayer on account of the particular taxpayer's tax liability will discharge the joint liability to the extent of the payment.

Subsection 160(3) is amended so that it also applies where the particular taxpayer has become jointly and severally, or solidarily, liable with another taxpayer because of paragraph 94(3)(d) or (e) or subsection 94(17) in respect of part or all of a liability under this Act of the other taxpayer. The expression "solidarily " is added to ensure that the Act appropriately reflects both the civil law of the province of Quebec and the law of other provinces. For more information on paragraphs 94(3)(d) and (e) and subsection 94(17), see the commentary on those provisions.

This amendment applies to assessments made after 2006, except that new subsection 160(2.1) is to be read without reference to subsection 94(17) in its application to taxation years that end before March 5, 2010.

Clause 16 and 17

Application of subsection 75(2)

ITA
162 and 163

Subsections 162 and 163 of the Act impose penalties for infractions such as failing to provide certain information on a return, failing to file a return for a taxation year, and making false statements on a return.

ITA
162(10.1) and (10.11)

Subsection 162(10.1) of the Act imposes a penalty on any person or partnership that is more than 24 months late in filing an information return that the person or partnership was required to file under any of sections 233.1 to 233.4. This penalty applies in addition to the penalties imposed under subsections 162(7) and (10).

The penalty imposed under subsection 162(10.1) with respect to a particular information return is equal to a specified amount less the amount of the penalties imposed under subsections 162(7) and (10) with respect to the return. The specified amount with respect to an information return for a trust required to be filed by a person or partnership under section 233.2 is equal to 5% of the total fair market value of any property transferred or loaned to the trust that, if no other loan or transfer were taken into account, would have imposed an obligation on the person or partnership to file the return.

Amendments are made to paragraph 162(10.1)(d) in the English version of the Act and to paragraph 162(10.1)(c) of the French version of the Act.

Subsection 162(10.1) is amended, as a consequence of amendments made to section 233.2, by changing the manner in which the specified amount is determined. The specified amount is now to be determined with reference to the fair market value of "contributions" made by the person or partnership to the trust.

New subsection 162(10.11) provides that, for the purpose of the calculation in subsection 162(10.1), the definitions and rules in subsections 94(1), (2) and (9) generally apply. Subsection 162(10.11) is similar to amended subsection 233.2(2), described in greater detail in the commentary below.

These amendments apply to returns in respect of taxation years that end after 2006. They also apply to returns in respect of an earlier taxation of a taxpayer (e.g., a trust, beneficiary under the trust or contributor to the trust) if new subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year of the taxpayer.

ITA
163(2.4)(b) and (2.41)

Subsection 163(2.4) of the Act imposes a penalty on any person or partnership that, knowingly or under circumstances amounting to gross negligence, has made or has participated in, assented to, or acquiesced in, the making of a false statement or omission in a return required to be filed under any of sections 233.1 to 233.6. The penalty under paragraph 163(2.4)(b) relates to a return required to be filed under section 233.2. The existing penalty is the greater of $24,000 and 5% of the total fair market value of the property that the person or partnership loaned or transferred to the trust that gave rise to the obligation to file.

Paragraph 163(2.4)(b) is amended as a consequence of changes made to the non-resident trust rules in section 94 and the annual reporting requirement in respect of non-resident trusts under section 233.2. Under amended section 233.2, a person is subject to the annual reporting requirement where the person makes a "contribution" to the trust.

Accordingly, amended paragraph 163(2.4)(b) provides for a penalty for a person equal to the greater of $24,000 and a specified amount in respect of the return. The specified amount for a person is essentially equal to 5% of the fair market value of "contributions" made by the person. The specified amount is calculated in the same way as the specified amount under amended subsection 162(10.1) in respect of late-filed returns. Under new subsection 163(2.41), the definitions and rules in subsections 94(1), (2) and (9) generally apply. Subsection 163(2.41) is similar to amended subsection 233.2(2), described in greater detail in the commentary below.

These amendments apply to returns in respect of taxation years that end after 2006. They also apply to returns in respect of an earlier taxation of a taxpayer (e.g., a trust, beneficiary under the trust or contributor to the trust) if new subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year of the taxpayer.

Clause 18

Withholding and Remittance of Tax

ITA
215

Section 215 sets out rules governing when a person paying or crediting an amount to a non-resident must withhold a portion of the amount paid or credited.

ITA
215(1)

Subsection 215(1) provides that, where a resident of Canada pays or is deemed to pay an amount to a non-resident person in respect of which the non-resident person is liable for withholding tax under Part XIII, the payer is required to withhold the tax from the amount and remit it to the Receiver General on behalf of the non-resident.

Subsection 215(1) is amended to ensure that, where an amount is paid or credited (or deemed to be paid or credited) to a trust that is deemed, by paragraph 94(3)(a), to be resident in Canada for the purpose of determining the trust's liability for tax under Part XIII, the payer is required to withhold the tax that would otherwise be payable by the trust and to remit it to the Receiver General.

For more detail on the application of Part XIII to trusts deemed, under paragraph 94(3)(a), to be resident in Canada, and to payers of amounts to such trusts, see the commentary on subsection 94(3) and (4) and subsections 104(7.01) and 216(4.1).

This amendment applies to trust taxation years that end after 2006. It also applies to each earlier taxation year of a trust if new subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year.

Clause 19

Deduction and Payment of Tax

ITA
216

Section 216 of the Act provides certain rules relating to non‑residents who elect to be taxed under Part I in respect of certain rental and timber royalty income rather than under Part XIII, which would normally apply in such circumstances.

Rents and Timber Royalties – Optional Method of Payment

ITA
216 (4.1)

In general, Part XIII of the Act imposes a withholding tax of 25% on rental payments made by Canadians to non-resident owners of Canadian real property. An exception to this general rule exists where a non-resident chooses, under subsection 216(4) of the Act, to file a Canadian income tax return in respect of the rental income and timber royalty income and pay tax on the net amount of such income. Where the conditions of subsection 216(4) are satisfied, the rule requiring a Canadian payer (or agent of the payee pursuant to s. 215(3)) to remit 25% of the gross payment to the Receiver General does not apply; instead, only 25% of the net amount of income received by the non-resident's agent need be remitted.

Although an otherwise non-resident trust to which paragraph 94(3)(a) of the Act applies is deemed resident in Canada for the purposes of determining the trust's liability under Part XIII on amounts paid or credited to the trust, for the purpose of determining the liability of a Canadian payer on amounts paid or credited to the trust, the trust is effectively treated as non-resident (see paragraph 94(4)(c) and section 215).

Subsection 216(4.1) is introduced to provide a measure of relief in these circumstances. Under that subsection, if a trust is deemed by subsection 94(3) to be resident in Canada for a taxation year for the purpose of computing the trust's income for the year, a person who is otherwise required by subsection 215(3) to remit in the year, in respect of the trust, an amount to the Receiver General in payment of tax on rent on real property or on a timber royalty may elect in prescribed form filed with the Minister under subsection 216(4.1) not to remit under subsection 215(3) in respect of amounts received after the election is made. Under paragraphs 216(4.1)(a) and (b), if that election is made, the elector is required to,

  • when any amount is available out of the rent or royalty received for remittance to the trust, deduct 25% of the amount available and remit the amount deducted to the Receiver General on behalf of the trust on account of the trust's tax under Part I; and

if the trust does not file a return for the year as required by section 150, or does not pay the tax that the trust is liable to pay under Part I for the year within the time required by that Part, on the expiration of the later of the time for filing or payment, as the case may be, pay to the Receiver General, on account of the trust's tax under Part I, the amount by which the full amount that the elector would otherwise have been required to remit in the year in respect of the rent or royalty exceeds the amounts that the elector has remitted in the year under paragraph 216(4.1)(a) in respect of the rent or royalty.

This amendment applies to trust taxation years that end after 2006. It also applies to each earlier taxation year of a trust if new subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year. An election referred to in new subsection 216(4.1) is deemed to have been filed with the Minister on a timely basis if it is filed on or before the trust's filing-due date for the taxation year of the trust that includes the day on which the new rules are assented to.

Clause 20

Foreign Reporting Requirements

ITA
233.2

Existing section 233.2 of the Act requires certain persons who have made transfers or loans to a "specified foreign trust", or to a non-resident corporation that is a controlled foreign affiliate of such a trust, to file annual information returns with respect to the trust. A "specified foreign trust", as defined in subsection 233.2, includes a trust with a "specified beneficiary" resident in Canada. As defined in subsection 233.2(1), a "specified beneficiary" is generally any beneficiary under the trust with the exception of persons listed in subparagraphs (a)(i) to (x) of the definition. For a return to be required to be filed as a consequence of a transfer or loan, it is necessary to have a "non-arm's length indicator", as set out in subsection 233.2(2), apply in respect of the transfer or loan. One of the cases where a "non-arm's length indicator" applies in respect of a transfer to a trust is where the transferor is a "specified beneficiary" under the trust. Subsection 233.2(3) provides a look-through rule so that, where a partnership transfers property, it is considered to have been transferred by members of the partnership.

Filing Information on Foreign Trusts

ITA
233.2(4)

New section 94 sets out new rules governing the taxation of non-resident trusts. In order to be consistent with the new rules:

  • the definitions "specified beneficiary" and "specified foreign trust" in section 233.2 are repealed,
  • there is no longer a requirement for a "non-arm's length indicator", so the existing rule in subsection 233.2(2) is repealed,
  • except as described below, the definitions and rules of application in subsections 94(1), (2) and (10) to (13) apply because of amended subsection 233.2(2), and

there is no longer a requirement for an explicit look-through rule for partnerships in section 233.2, given that the rule in paragraph 94(2)(o) applies because of amended subsection 233.2(2). Consequently, subsection 233.2(3) is repealed.

Under amended subsection 233.2(4), reporting will generally be required for a taxation year of a person if the person is a "contributor", "connected contributor" or "resident contributor" to a trust that is non-resident at a "specified time" in the taxation year, of the trust, that ends in that taxation year of the taxpayer. Because of amended subsection 233.2(2), the expressions "contributor", "contribution", "connected contributor", "resident contributor" and "specified time" generally carry the same meaning as in new section 94 (including by reference to deeming rules such as, for example, 94(12) and (13)), with most of the same exceptions for "arm's length transfers" contained in the definition of that expression in subsection 94(1). However, the exception in that definition against transfers of "restricted property" (as defined in subsection 94(1)) is extended to apply to most transfers described in paragraph 94(2)(g) (unless the transfer involves, generally, an issuance of a unit or share from a mutual fund trust, a mutual fund corporation or a corporation other than a closely-held corporation, as the case may be). This more constrained meaning of "arm's length transfer" for these purposes ensures that a broader category of transfers and loans are treated as contributions in determining whether a person is a contributor for the purposes of subsections 233.2(4) and (4.1). It should be noted that amended subsection 233.2(2) also applies for the purpose of new paragraph 233.5(c.1).

New subparagraph 233.2(4)(c)(ii) sets out a list of persons for whom reporting obligations are not imposed. This list is consistent with the list of beneficiaries who are not treated as "specified beneficiaries" under the existing rules in section 233.2. The exclusion in clause 233.2(4)(c)(ii)(G) for a particular person resident in Canada who has made a contribution to a trust described in any of clauses (B) to (F) ensures that the particular person does not have a reporting obligation solely by reason of the particular person's contribution to a trust described in any of clauses (B) to (F). However, the particular person would have a reporting obligation if, in addition to a contribution to a trust described in any of clauses (B) to (F), the particular person made another contribution to the trust.

Amended subsection 233.2(4) of the Act also exempts contributors from filing information returns under section 233.2 with regard to trusts described in any of paragraphs (c) to (h) of the new definition "exempt foreign trust" in subsection 94(1). For more information in this regard, see the commentary on that definition.

These amendments generally apply to returns in respect of trust taxation years that end after 2006. They also apply to returns in respect of an earlier taxation year of a trust if new subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year. A return required to be filed by a person because of amended subsection 233.2(4) of the Act is deemed to have been filed with the Minister on a timely basis if it is filed with the Minister on or before the person's filing-due date for the person's taxation year that includes the day on which the new rules are assented to.

Similar Arrangements

ITA
233.2(4.1)

New section 94 of the Act sets out new rules governing the taxation of non-resident trusts. However, the deeming provisions in subsection 94(3) apply only to arrangements that are considered to be trusts for Canadian income tax purposes. In some cases, there may be doubt as to whether a given arrangement is a trust for Canadian income tax purposes.

New subsection 233.2(4.1) of the Act, in combination with subsection 233.2(4), extends the filing obligation under subsection 233.2(4) in respect of trusts so that it also applies in respect of certain entities or arrangements for which reporting is not otherwise required. One of the key objectives of subsection 233.2(4.1) is to ensure that claims that section 94 does not apply can be reviewed by the CRA

More specifically, new subsection 233.2(4.1) applies where property has, directly or indirectly, been transferred or loaned by a person to be held

  • under an arrangement governed by laws that are not laws of Canada or a province, or

by a non‑resident entity (as defined in subsection 94.1(2)).

The person must, where certain additional conditions are satisfied, file the information return referred to in amended subsection 233.2(4).

New subsection 233.2(4.1) provides that, except as the Minister of National Revenue otherwise permits in writing, the person has obligations under amended subsection 233.2(4) if all of the following conditions are satisfied:

  • the transfer or loan is not an arm's length transfer (within the meaning assigned by the definition "arm's length transfer" in subsection 94(1) as amended by subsection 233.2(2));
  • the transfer or loan is not solely in exchange for property that would be described in paragraphs (a) to (i) of the definition "specified foreign property" in subsection 233.3(1) if that definition were read without reference to paragraphs (j) to (q) of that definition;
  • the entity or arrangement is not a trust in respect of which the person would, without reference to subsection 233.2(4.1) and the explicit exemptions for filing returns contained in subsection 233.2(4), be required to file an information return for a taxation year that includes that time; and
  • the entity or arrangement is, for a taxation year or fiscal period that includes that time, not

(i) an exempt foreign trust (as defined in subsection 94(1)),

(ii) a foreign affiliate in respect of which the person is a reporting entity (as defined in subsection 233.4(1)), or

(iii) an exempt trust (as defined in subsection 233.2(1)).

Where the above conditions are satisfied, the person's obligations under subsection 233.2(4) and related provisions are determined as if:

  • the transfer were a contribution to which paragraph 233.2(4)(a) applied;
  • the entity or arrangement were a trust not resident in Canada throughout the calendar year that includes the time of the transfer or loan; and

the taxation year of the entity or arrangement were that calendar year.

These amendments generally apply to returns in respect of trust taxation years that end after 2006. They also apply to returns in respect of an earlier taxation year of a trust if new subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year. A return required to be filed by a person because of amended subsection 233.2(4) of the Act is deemed to have been filed with the Minister on a timely basis if it is filed with the Minister on or before the person's filing-due date for the person's taxation year that includes the day on which the new rules are assented to.

Clause 21

Returns in Respect of Foreign Property

ITA
233.3

Section 233.3 of the Act provides reporting requirements in respect of foreign property. In general terms, it provides that certain taxpayers resident in Canada and certain partnerships must file an information return with respect to their "specified foreign property" if the total cost amount of such property exceeds $100,000. For this purpose, "specified foreign property" (as defined in subsection 233.3(1)) includes an interest in a non‑resident trust or a trust that would be non‑resident were it not for section 94. It does not include an interest in a non‑resident trust that was not acquired for consideration by the person or partnership or a related person or partnership.

Paragraph (d) of the definition "specified foreign property" is amended by eliminating the reference to section 94. Under new subparagraph 94(3)(a)(vi) of the Act, a trust is deemed to be resident in Canada for the purpose of determining its obligation to file a return under section 233.3, but is not deemed resident in Canada for purposes of determining the obligation of a person or partnership with an interest in the trust to file a return under that section. As a result, such a deemed resident trust will be treated as resident in Canada in determining whether it is a specified Canadian entity and a reporting entity for purposes of section 233.3. As well, in respect of the obligations of a person or partnership that has an interest in the trust, an interest in the trust will be considered a specified foreign property unless otherwise expressly excluded.

This amendment generally applies to returns in respect of trust taxation years that end after 2006. It also applies to returns in respect of an earlier taxation year of a trust if new subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year.

Clause 22

Due Diligence Exception

ITA
233.5

Section 233.5 of the Act provides that, where specified conditions set out in paragraphs 233.5(a) to (d) are met, information required in a return filed under section 233.2 or 233.4 does not include information that is not available to the person or partnership required to file the return. In the case of a return required to be filed by a person or partnership under section 233.2, paragraph 233.5(c) provides that it must be reasonable for the person or partnership to expect, at the time of each transaction entered into by the person or partnership after March 5, 1996 that either gives rise to the requirement to file the return or that affects the information to be reported in the return, that sufficient information would be available to the person or partnership to comply with section 233.2.

Paragraph 233.5(c) is amended so that it applies only in connection with transactions entered into before June 23, 2000 that gave rise to the requirement to file a return for a taxation year of the trust that ended before 2007. In connection with trust returns required to be filed for trust taxation years that ended before 2007, it must be reasonable for the person or partnership to expect that sufficient information would have been available to the person or partnership to comply with section 233.2 if the proposed amendments to section 94 were not taken into account.

Paragraph 223.5(c) is also amended so that it does not apply to returns required to be filed under section 233.4. It is replaced in this respect by new paragraph 233.5(c.2), without any change in the specified conditions for such returns.

Paragraph 233.5(c.1) is introduced in connection with returns required to be filed under section 233.2 by a person or partnership for a taxation year of the trust where the trust is subject to new section 94. Where "contributions" (determined with reference to subsection 233.2(2), referred to in the commentary above) are made after June 22, 2000, relief under section 233.5 is available only if it was reasonable for the person or partnership to expect, at the time of each such contribution that either gives rise to the requirement to file the return or that affects the information to be reported in the return, that sufficient information would be available to the person or partnership to comply with section 233.2.

These amendments generally apply to returns in respect of trust taxation years that end after 2006. They also apply to returns in respect of an earlier taxation year of a trust if new subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year.

Clause 23

Interpretation

ITA
248(1)

"amount"

The expression "amount" is defined in subsection 248(1) to mean money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing. A number of special definitions of "amount", which apply in limited circumstances, are set out in paragraphs (a) to (c) of the definition.

The definition "amount" is amended to add new paragraph (b.1). New paragraph (b.1) of that definition provides that in the case of a stock dividend paid by a non-resident corporation, the amount of any stock dividend is, except where subsection 95(7) applies to the dividend, the greater of two amounts. The first is the amount by which the paid-up capital of the corporation that paid the dividend is increased by reason of the payment of the dividend. The second is the fair market value of the share or shares paid as a stock dividend at the time of payment.

This amendment applies to dividends declared on or after July 18, 2005.

Income Tax Amendments Act, 2000

Clause 24

Inter Vivos Transfer of Property by an Individual

S.C. 2001, C. 17
53(2)(a)

ITA
73(1)

Subsection 73(1) of the Income Tax Act generally provides for a tax-free disposition of capital property if it is transferred by an individual to the individual's spouse, common-law partner or a trust for the exclusive benefit of the spouse or common-law partner during the lifetime of the spouse or common-law partner. For subsection 73(1) to apply, the transferor and transferee must both be resident in Canada at the time of the transfer. Where the transferee is a trust, in respect of transfers that occur in 2000 or 2001, the residency requirement is determined without reference to subsection 94(1) as it read before 2002.

This amendment to the Income Tax Amendments Act, 2000, ensures that, in applying subsection 73(1) in respect of transfers that occur after 1999 and before 2007, the residence of a transferee will be determined without reference to section 94 of the Act, as it reads in its application to taxation years that end before 2007.

This amendment is deemed to come into force on June 14, 2001.

Clause 25

Disposition by Taxpayer of Capital Interest

S.C. 2001, C. 17
80(19)

ITA
107(1)

Paragraph 107(1)(a) of the Income Tax Act applies for the purpose of computing a taxpayer's taxable capital gain from the disposition of a capital interest in a personal trust (or a prescribed trust described in section 4800.1 of the Regulations), except where the interest was an interest in a non-resident inter vivos trust purchased by the taxpayer and the disposition was not by way of a distribution to which subsection 107(2) applies. For this purpose the residency of the trust is to be determined without reference to section 94 as it read before 2002.

This amendment to the Income Tax Amendments Act, 2000, ensures that, in applying subsection 107(1) in respect of transfers that occur after 1999 and before 2007, the residence of a transferee trust will be determined without reference to section 94 of the Act, as it reads in its application to taxation years that began before 2007.

This amendment is deemed to come into force on June 14, 2001.

Income Tax Conventions Interpretation Act

Clause 26

Application of section 94 of the Income Tax Act

ITCIA
4.3

The Income Tax Conventions Interpretation Act contains rules that govern the interpretation of certain provisions of the tax treaties concluded by Canada. It is important that the treaties be applied consistently and in conformity with the intentions of Canada and its treaty partners. To make consistent application easier, the Income Tax Conventions Interpretation Act sets out a number of interpretive rules and definitions.

The Income Tax Conventions Interpretation Act is amended to add new section 4.3. New section 4.3 clarifies that the law of Canada is such that, notwithstanding the provisions of a convention or the Act giving the convention the force of law in Canada, a trust that is deemed resident in Canada under new subsection 94(3) of the Income Tax Act will be a resident of Canada and not a resident of the other contracting state for the purposes of applying the convention. This amendment is intended to ensure consistent application of Canada's treaties and in a way that conforms to a principal objective of Canada's tax treaties, namely of preventing tax avoidance and tax evasion.

This amendment applies after March 4, 2010.

Income Tax Regulations

Clause 27

Payments to Non-residents

ITR
202

Sections 202 and 210 of the Regulations provide rules setting out the circumstances under which information returns are required in connection with payments to non-residents.

Section 202 is amended by adding new subsection 202(6.1). Subsection 202(6.1) clarifies that a trust that is deemed by subsection 94(3) of the Act to be resident in Canada for a taxation year is required to make information returns under section 202 in respect of amounts that are paid or credited by it to non-resident persons that are described by subsections 202(1) and (2) of the Regulations (other than exempt amounts as defined in subsection 94(1) of the Act).

This amendment applies to amounts paid or credited after ANNOUNCEMENT DATE.

Clause 28

Prescribed Circumstances

ITR
5909

Section 5909 of the Regulations defines property acquired in prescribed circumstances for the purposes of existing section 94 of the Act. That section 94 of the Act had application where a trust acquired property in certain circumstances, otherwise than those prescribed. Section 5909 prescribes circumstances for this purpose. With the repeal and replacement of existing section 94, the prescribing power to use section 5909 for the above purposes no longer exists. As a result, the section is repealed.

This amendment generally applies to returns in respect of trust taxation years that end after 2006. It also applies to returns in respect of an earlier taxation year of a trust if new subsection 94(3) of the Act applies (because of a valid election by the trust under the coming-into-force provision for new section 94 of the Act) to that earlier taxation year.

Part 2

Amendments in Respect of Foreign Affiliates

Income Tax Act

Clause 29

Adjustments to Cost Base

ITA
53(1)(d)

Subsection 53(1) of the Income Tax Act (the "Act") sets out a number of amounts that are added in computing a taxpayer's adjusted cost base of a property. Paragraph 53(1)(d) provides that, where the property is a share of the capital stock of a foreign affiliate of the taxpayer, there is to be added any amount required by paragraph 92(1)(a) to be added in computing the adjusted cost base to the taxpayer of the share.

Consequential to new subsection 92(1.1), which also provides for additions in computing the taxpayer's adjusted cost base of a share of a foreign affiliate, paragraph 53(1)(d) is amended to refer to section 92, instead of only paragraph 92(1)(a). For more detail about new subsection 92(1.1), refer to the commentary on that subsection. This amendment also allows for cost base adjustments pursuant to transitional subsection 92(1.4) where an election is made under clause 51 to have the so-called "consolidated net surplus" rules apply.

This amendment applies after December 20, 2002.

Clause 30

Winding-up

ITA
88(1)

Subsection 88(1) of the Act provides rules that apply in certain circumstances where a taxable Canadian corporation (the "subsidiary") has been wound-up into its parent. These rules can also apply in certain circumstances when the parent and the subsidiary are merged by way of an amalgamation.

ITA
88(1)(d)

Paragraph 88(1)(d) of the Act determines, for the purposes of paragraph 88(1)(c), the amount by which the parent may, by designation, increase or "bump" the cost of capital property acquired by it on the winding-up of the subsidiary.

Subparagraph 88(1)(d)(ii) provides for a limitation to the "bump" amount based on the amount by which the fair market value of the property at the time the parent last acquired control of the subsidiary exceeds the cost amount to the subsidiary of the property immediately before the winding-up.

Subparagraph 88(1)(d)(ii) is being amended to further restrict the "bump" amount by an amount prescribed by the Income Tax Regulations (the "Regulations"), more particularly new subsections 5905(5.13) and (5.4) of the Regulations. This additional restriction applies only to property that is a share of a foreign affiliate or an interest in a partnership that holds shares of a foreign affiliate.

For more detail about this prescribed amount, see the commentary to new subsections 5905(5.13) and (5.4) of the Regulations.

The French version of subparagraph 88(1)(d)(iii) is also being amended to correct some language deficiencies.

These amendments apply to windings-up that begin, and amalgamations that occur, after February 27, 2004.

ITA
88(1.8) and (1.9)

New subsections 88(1.8) and (1.9) of the Act allow a taxpayer to amend certain "bump" designations made under paragraph 88(1)(d) where certain conditions are met. The conditions are meant to capture situations in which the bump room has been limited by the application of subsection 5905(5.4) of the Regulations. Although the ability to amend such a designation is subject to the discretion of the Minister, it is generally expected that the "just and equitable" standard would be met where the taxpayer's computation of the relevant "tax-free surplus balance" requires adjustment because of a foreign tax assessment or an adjustment on audit by the Minister. However, it should be kept in mind that there is a requirement, in paragraph 88(1.8)(b), for "reasonable efforts" to have been made in the initial determination of the "tax-free surplus balance" of the relevant affiliate.

These new subsections apply after December 18, 2009.

Clause 31

Adjustment for Prescribed Amount

ITA
92(1.1)

Section 92 of the Act provides for certain adjustments to the adjusted cost base to a taxpayer of a share of a foreign affiliate. It also provides special rules relating to partnerships that hold foreign affiliate shares.

New subsection 92(1.1) provides for an increase in the adjusted cost base of certain foreign affiliate shares. Paragraph 92(1.1)(a) deals with foreign affiliate shares held by another foreign affiliate. Its adjustment is based on an amount prescribed in subsection 5905(7.6) of the Regulations. Paragraph 92(1.1)(b) deals with foreign affiliate shares held by a partnership of which another foreign affiliate is a member. Its adjustment is based on an amount prescribed in paragraph 5908(11)(a) of the Regulations. These adjustments apply to certain internal reorganization transactions to which the new "fill-the-hole" rule applies.

For more details about the new "fill-the-hole" rule, see the commentary for new subsections 5905(7.1) to (7.7) of the Regulations.

This new subsection applies after December 18, 2009.

Clause 32

Election for Disposition of Share in Foreign Affiliate

ITA
93(1)(b)

Paragraph 93(1)(b) of the Act applies whenever a corporation resident in Canada or a foreign affiliate of such a corporation (the corporation or affiliate being defined as the "disposing corporation") is treated as having realized a gain under subsection 40(3) on the disposition of a share of a foreign affiliate of the corporation (i.e., because of a "negative" adjusted cost base of the share).

Subparagraph 93(1)(b)(i) provides that any amount that the corporation elects to treat as a dividend in respect of the share, instead of proceeds of disposition of the share, will reduce the amount of the gain. In order to ensure that the adjusted cost base of the share of the foreign affiliate is returned to nil, this reduction will not apply for the purposes of paragraph 53(1)(a) which adds the gain under subsection 40(3) in determining the adjusted cost base of the share.

Subparagraph 93(1)(b)(ii) provides that the foreign affiliate will be considered to have redeemed shares of a class of its capital stock for the purposes of calculating its surplus accounts in respect of the corporation. This ensures that the exempt surplus, exempt deficit, taxable surplus, taxable deficit and underlying foreign tax in respect of the corporation are appropriately reduced under subsection 5905(2) of the Regulations to reflect the portion of these accounts that is utilized as a result of the deemed payment of the dividend by the foreign affiliate to the disposing corporation.

Paragraph 93(1)(b) is being restructured to remove the rule that is currently in subparagraph 93(1)(b)(ii). That rule is no longer necessary as the appropriate reductions to the surplus accounts of the foreign affiliate will now be effected under new paragraph 5902(1)(b) of the Regulations, without the need for any special deeming rule. For more detail, see the commentary for subsection 5902(1).

This amendment applies in respect of elections made in respect of dispositions that occur after December 18, 2009.

Disposition of a Share of a Foreign Affiliate Held by a Partnership

ITA
93(1.2)(a)(ii)

Subsection 93(1.2) of the Act provides rules for partnership dispositions of foreign affiliate shares that are similar to the rules in subsection 93(1). These rules allow for an election to reduce the taxable capital gain of the partnership in respect of such dispositions and to instead treat the grossed-up elected amount as a dividend from the foreign affiliate. Subsection 93(1.3) provides for the automatic application of subsection 93(1.2) where the partnership interest is held by another foreign affiliate. Where subsection 93(1.3) applies, the amount elected under subsection 93(1.2) is determined by reference to an amount prescribed by the Regulations.

Subparagraph 93(1.2)(a)(ii) is amended to clarify the link between that subparagraph and the relevant regulation – new paragraph 5908(8)(c) of the Regulations.

This amendment applies in respect of elections made under subsection 93(1.2) of the Act in respect of dispositions that occur after November 1999.

Exempt Dividends

ITA
93(3)

Subsection 93(3) of the Act is an interpretive rule for the foreign affiliate "stop-loss" rules in subsections 93(2) to (2.3) of the Act. It provides the circumstances in which certain dividends received from a foreign affiliate are considered "exempt dividends" for the purposes of those stop-loss rules.

Subsection 93(3) is being amended by adding new paragraph (c) which deems a prescribed amount to be an exempt dividend that is subject to those stop-loss rules. The rules that prescribe that amount are found in new subsection 5905(7.7) of the Regulations.

This amendment applies after December 18, 2009.

ITA
93(5.2)

New subsection 93(5.2) of the Act is added in order to provide taxpayers with the ability to amend certain subsection 93(1) elections without having to pay a late-filing penalty. This new provision is related to the announcement on December 18, 2009 of the abandonment of the "consolidated net surplus" proposals that were issued in draft form on February 27, 2004. Although the ability to amend such an election is subject to the discretion of the Minister, it is generally expected that the "just and equitable" standard would be met where the taxpayer's original subsection 93(1) election was filed on the basis of the "consolidated net surplus" rules and the taxpayer simply wishes to amend the election to reflect their non-application.

This new subsection applies after December 18, 2009.

Clause 33

ITA
95

Section 95 of the Act defines a number of terms and provides rules relating to the taxation of shareholders of foreign affiliates.

Definitions

ITA
95(1)

Subsection 95(1) defines a number of terms that apply for the purposes of subdivision i of Division B of Part I of the Act.

"foreign accrual property income"

The definition "foreign accrual property income" (referred to in these notes as "FAPI") in subsection 95(1) is relevant for the purposes of section 91 and for the purposes of determining the tax surpluses and deficits of a foreign affiliate of a taxpayer. Section 91 provides rules for determining amounts that the taxpayer is to include in computing its income for a particular taxation year as income from a share of a controlled foreign affiliate.

Variables A to C of the FAPI definition contain the additions to FAPI and variables D to H contain the deductions from FAPI. Where the deductions exceed the additions, the resulting amount is a foreign accrual property loss (referred to in these notes as a "FAPL"). FAPLs of other years are taken into account in the determination of FAPI by virtue of variable F and section 5903 of the Regulations.

As discussed below, section 5903 of the Regulations is being significantly modified. The description of variable F of the FAPI definition is being amended in order to better integrate its language with new section 5903.

This amendment applies to taxation years of a foreign affiliate that begin after November 1999.

ITA
95(1) to 95(2.5)
Subsection 95(1) "investment business" clause (a)(i)(A)
Subsection 95(1) "permanent establishment"
Clause 95(2)(l)(iii)(A)
Clause 95(2.3)(b)(ii)(A)
Subparagraph 95(2.4)(a)(i)
Subsection 95(2.5) "indebtedness" subclause (c)(ii)(B)(I)

The definition "permanent establishment" is being added to subsection 95(1) of the Act. This definition will have the meaning assigned by paragraph 5906(2)(b) of the Regulations. There are a number of provisions of subdivision i of Division B of Part I of the Act that use the term "permanent establishment", some of which make reference to the Regulations, some of which do not. The definition of "permanent establishment" in subsection 95(1) and the meaning prescribed for that definition in amended paragraph 5906(2)(b) are meant to provide a consistent definition of that term for all purposes of the foreign affiliate rules in subdivision i.

The provisions of subdivision i which currently make specific reference to the Regulations for the meaning of "permanent establishment" are being amended to remove those references. Those references will no longer be necessary once the definition "permanent establishment" is added to subsection 95(1) of the Act. The relevant provisions are:

  • clause (a)(i)(A) of the definition "investment business" in subsection 95(1),
  • clause 95(2)(l)(iii)(A),
  • clause 95(2.3)(b)(ii)(A),
  • subparagraph 95(2.4)(a)(i), and
  • subclause (c)(ii)(B)(I) of the definition "indebtedness" in subsection 95(2.5).

For more details, see the commentary to section 5906 of the Regulations.

The new definition "permanent establishment" and the consequential amendments to section 95 apply to taxation years of a foreign affiliate that begin after 1999.

Clause 34

Assessment and Reassessment

ITA
152(4)(b)(i)

In general terms, subsection 152(4) 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 the exceptions described in paragraphs 152(4)(a) to (d) apply.

Subparagraph 152(4)(b)(i) allows the Minister of National Revenue to assess or reassess tax within an additional 3 years where the assessment or reassessment is required by subsection 152(6). Subsection 152(6) may apply, for example, where a taxpayer carries back a loss pursuant to section 111 of the Act.

Subparagraph 152(4)(b)(i) is being amended by adding a reference to subsection 152(6.1) in order to allow the Minister of National Revenue to also assess or reassess tax within an additional 3 years where the assessment or reassessment is required by that subsection because of the carryback of a FAPL.

This amendment applies to taxation years that begin after November 1999.

Reassessment if Amount under s. 91(1) is reduced

ITA
152(6.1)

Subsection 152(6.1) of the Act provides for the reassessment of a taxpayer in certain circumstances where a FAPL of a foreign affiliate of the taxpayer is carried back.

Subsection 152(6.1) is being amended to reflect the restructuring of section 5903 of the Regulations and variable F of the FAPI definition in subsection 95(1) of the Act.

This amendment applies to taxation years that begin after November 1999.   

Clause 35

Effect of Carryback of Loss, etc.

ITA
161(7)

Subsection 161(7) of the Act provides that, where the amount of tax payable for a taxation year is reduced because of certain deductions or exclusions arising from the carryback of losses or tax credits or from events in subsequent taxation years, interest on any unpaid tax for the taxation year is calculated without regard to the reduction until the day that is 30 days after the latest of several dates.

Subsection 161(7) is being amended in three ways. First, the preamble of paragraph 161(7)(a) is amended to add a reference to a "reduction" of an amount specified in its subparagraphs. Second, new subparagraph 161(7)(a)(xii) is added in order to provide for amounts by which income is reduced because of the carryback of certain FAPLs of a foreign affiliate. Third, subparagraph 161(7)(b)(iii) is amended to add a reference to subsection 152(6.1) of the Act.

These amendments apply to taxation years that begin after December 18, 2009.

Clause 36

Effect of Carryback of Loss, etc.

ITA
164(5)

Subsection 164(5) of the Act provides that, where the tax payable for a taxation year is reduced because of certain deductions or exclusions arising from the carryback of losses or tax credits or from events in subsequent taxation years, interest payable to a taxpayer on any resulting overpayment of tax is to be calculated as if the overpayment had arisen on the day that is 30 days after the latest of several dates.

Subsection 164(5) is being amended in two ways. First, new paragraph 164(5)(h.4) is added in order to provide for amounts by which income is reduced because of the carryback of certain FAPLs of a foreign affiliate. Second, paragraph 164(5)(k) is amended to add a reference to subsection 152(6.1) of the Act.

These amendments apply to taxation years that begin after December 18, 2009.

Clause 37

Acquiring Control

ITA
256(7)

Subsection 256(7) of the Act provides rules for certain enumerated provisions of the Act that deem certain transactions or events to result, or not to result, in an acquisition of control of a corporation. Subsection 256(7) is amended to add to those enumerated provisions a reference to new subsection 5905(5.2) of the Regulations, a rule that is engaged where a Canadian corporation is subject to an acquisition of control.

This amendment applies after December 18, 2009.

Clause 38

Functional Currency Tax Reporting

ITA
261(5)

Subsection 261(5) of the Act provides a number of rules for taxpayers that have elected under the functional currency tax reporting regime. Subparagraph 261(5)(h)(i) provides "reading rules" in respect of foreign affiliates of a functional currency tax reporter that replace references in the Act and the Regulations to "Canadian currency" with references to the taxpayer's elected functional currency. Subparagraph 261(5)(h)(i) is amended to remove the exception for subsection 5907(6) of the Regulations. This exception is no longer necessary as that subsection is being amended to remove the reference to Canadian currency.

This amendment applies in respect of taxation years of foreign affiliates that begin after December 18, 2009.

Amounts Carried Back

ITA
261(15)

Subsection 261(15) of the Act provides rules for the application of amounts carried back for taxpayers that have elected under the functional currency tax reporting regime. Subsection 261(15) is amended consequential to the introduction of a carryback provision for foreign accrual property losses, as provided for in amended subsection 5903(1) of the Regulations.

This amendment applies after December 13, 2007.

Budget and Economic Statement Implementation Act, 2007

Clause 39

The amendments to the Budget and Economic Statement Implementation Act, 2007 (referred to in these notes as "Bill C-28") are all in relation to foreign affiliates and can be grouped into four categories.

First, amendments are being made to correct some errors in certain of its transitional provisions. These are found in the amendments to paragraph 26(27)(b) and the English version of subsection 26(37), dealing with "controlled foreign affiliates" and "qualified foreign affiliates", respectively.

Second, the deadlines are being extended by 18 months in respect of the 7 different elections to effect further retroactive application of certain of the foreign affiliate provisions in Bill C-28. These deadline extensions are provided for in the amendments to paragraphs 26(35)(b) and (42)(b), and subsections 26(38), (40), (44), (45) and (46). 

Third, the scope of the revocation option is being broadened. Currently the so-called "global election" can be revoked by the filing-due date for the taxpayer's taxation year that includes December 14, 2010. Although the latter date is not being changed, this revocation option is being made applicable to the 6 other foreign affiliate elections as well, by virtue of an amendment to subsection 26(47).

Fourth, subsection 26(48) of Bill C-28 is being amended. Subsection 26(48) currently provides for an override of the normal statute-barring provisions of subsections 152(4) to (5) of the Income Tax Act in order to take into account the 7 elections referred to above. However, some foreign affiliate provisions of Bill C-28 have automatic, i.e. non-elective, application to periods that may be statute-barred. Thus, subsection 26(48) is being amended to also provide for the override of the normal statute-barring provisions of the Income Tax Act for any non-elective provision of section 26 of Bill C-28, as well as its subsection 10(3), at the option of the taxpayer. To avail itself of this option, the taxpayer must file an election on or before June 30, 2011.

Income Tax Regulations

ITR
Part LIX

Part LIX of the Regulations contains rules for the provisions of the Act that relate to foreign affiliates of a taxpayer resident in Canada. These provisions are primarily found in sections 91 to 93.1, 95 and 113 of the Act. Part LIX also provides, in section 5909, a rule relating to non-resident trusts, but that rule is not the subject of any amendment in this package.

Part LIX contains, among other things, rules respecting the computation of the exempt surplus, taxable surplus and underlying foreign tax balances of a foreign affiliate. These balances are used in determining (under section 113 of the Act) the amount deductible from the taxable income of a Canadian corporation in respect of the actual payment of a dividend by a foreign affiliate or, where an election is made under subsection 93(1) of the Act, a deemed dividend from a foreign affiliate. Part LIX also contains rules for the computation of a foreign affiliate's FAPL for a taxation year (in section 5903) and for the determination, in certain circumstances, of a share's "participating percentage" (in section 5904) for the purpose of determining the amount of FAPI to be included (under subsection 91(1) of the Act) in a taxpayer's income in respect of a share of a controlled foreign affiliate.

Various provisions of Part LIX are being amended. These amendments can be grouped into 10 different categories.

1. Budget 2007 Consequentials: This package of amendments provides consequential changes to the Regulations that flow from the amendments to the foreign affiliate provisions of the Act contained in Bill C-28 (which received royal assent on December 14, 2007) and the Budget Implementation Act, 2009 (which received royal assent on March 12, 2009). These Act changes, taken together, are referred to in these notes as the "Budget 2007 Act changes". These consequential amendments are primarily in section 5907, but there is also one change in new subsection 5905(5.2).

2. Partnerships: This package includes the restructuring of section 5902 and portions of section 5905, of the Regulations, in order to accommodate elections under subsection 93(1.2) of the Act in respect of partnership dispositions of foreign affiliate shares. New section 5908 is also added in order to consolidate various partnership provisions of Part LIX and provide for consequential changes that flow from certain amendments made to the Act in the Income Tax Amendments Act, 2000.

3. Foreign Accrual Property Losses ("FAPLs"): This package includes amendments in respect of FAPLs. These amendments are in section 5903 and subsections 5907(1.3) and (1.4). Some of these changes to section 5903 are consequential to the Budget 2007 Act changes that deal with paragraph 95(2)(f) of the Act and its related provisions.

4. Restructuring of Section 5905: As a result of certain changes that were necessitated by the partnership rules, portions of section 5905 have been either consolidated or restructured to make them more user-friendly. These provisions are generally found in existing subsections 5905(1) to (9), although no changes are proposed to existing subsection 5905(7).

5. Bump Rules: Substantial revisions are being made to rules initially proposed, in part, in a December 2002 draft technical bill and, in part, in the February 2004 revised version of that bill that deal with the interaction between foreign affiliate surplus balances and the winding-up bump under paragraph 88(1)(d) of the Act. These rules are found in new subsections 5905(5.11) to (5.13) and subsection 5905(5.4).

6. February 27, 2004 Proposals: Three significant features of the remaining foreign affiliate proposals issued in February 2004 are, as part of this package, being abandoned in favour of a new provision. This new provision is referred to in these notes as the "fill-the-hole" rule and is found in proposed subsections 5905(7.1) to (7.7). The three rules from the February 2004 proposals that are being abandoned, are as follows:

  • the "deficit levitation" rules that were found in proposed subsections 5905(7) to (7.4);
  • the "interest push-down rules" that were found in proposed subsections 5907(2.8) to (2.83); and
  • the "consolidated net surplus" rules that were generally found in various provisions of sections 5902 and 5905 of the Regulations and section 92 of the Act. Note, however, that taxpayers can elect to have these rules apply on a transitional basis. Readers are referred to the notes under clause 51 of this package for further details.

7. Permanent Establishments: Although partly consequential to the Budget 2007 Act changes, amendments are being made to section 5906 (and also to section 8201) of the Regulations to introduce a comprehensive definition of the term "permanent establishment" for the various foreign affiliate provisions of the Act and Part LIX of the Regulations. These amendments ensure that a common definition of "permanent establishment" applies for all purposes of the foreign affiliate rules.

8. Non-Taxable Portion of ECP Gains: A rule that was originally proposed in 2002 that includes in "exempt earnings" the non-taxable portion of gains from the disposition of eligible capital property, in certain circumstances, is included in this package. Additionally, a new rule is also being added to provide symmetry in respect of certain non-deducted amounts in respect of eligible capital property. That rule is found in paragraph (a.1) of the definition "exempt loss" in subsection 5907(1) of the Regulations.

9. Foreign Tax Consolidation: This package also includes some minor modifications to the foreign tax consolidation provisions in subsection 5907(1.1).

10. Foreign Oil and Gas Levies: This package includes new section 5910 which deems, in certain circumstances, a portion of certain foreign oil and gas levies to be income taxes paid by a foreign affiliate for the purposes of Part LIX of the Regulations. These rules are analogous to the amendments to section 126 of the Act (foreign tax credits) made as part of Budget 2000.

For more details on all of these amendments, refer to the notes below under the relevant headings.

Note that, to the extent they have not been dealt with as part of the amendments to the Act and the Regulations noted above, any outstanding measures from the foreign affiliate proposals issued in February 2004 will be the subject of a separate package of proposals to be issued in the near future.

Clause 40

Dividends out of Various Surplus Accounts

ITR
5900

Section 5900 is the main "gateway" to Part LIX of the Regulations. Its primary function is to prescribe the amounts that are deductible by a corporation resident in Canada under section 113 of the Act in respect of dividends from a foreign affiliate. Section 5900 is the section that makes relevant the concepts of exempt and taxable surplus, concepts that occupy a substantial portion of Part LIX of the Regulations. Section 5900 also prescribes rules for the purpose of claiming deductions under subsection 91(5) of the Act in respect of dividends received out of "previously-taxed FAPI". Subsection 91(5) is a rule that is aimed at avoiding double taxation.

ITR
5900(3)

Subsection 5900(3) is a rule that applies for the purpose of subsection 91(5) of the Act. Subsection 5900(3) ensures that an individual who reports FAPI is able to avoid double taxation of that FAPI when he or she receives a distribution of that income in the form of a dividend from a foreign affiliate.

Amended subsection 5900(3) clarifies the language of the provision and replaces the phrase "individual resident in Canada" with the phrase "person resident in Canada (other than a corporation)". The latter phrase is intended to clarify that deductions under subsection 91(5) are available to a partnership that has had an amount of FAPI included in its income under subsection 91(1) of the Act.

This amendment applies to dividends received after November 1999.

Clause 41 (and portions of clause 44)

Subsection 93(1) Elections

ITR
5902 and 5905

Current section 5902 of the Regulations applies where a corporation elects to treat proceeds of disposition of a share of a foreign affiliate as a dividend under subsection 93(1) of the Act. By virtue of new paragraph 5908(8)(a), section 5902 will also apply to elections made under subsection 93(1.2) of the Act in respect of dispositions of foreign affiliate shares by a partnership.

Section 5902 currently serves mainly to determine a foreign affiliate's surplus accounts and the amount of a whole dividend used in applying subsection 5901(1) for the purpose of subsection 5900(1) of the Regulations. These rules, in turn, determine the amount of the dividend that is deductible under section 113 of the Act.

Section 5905 of the Regulations provides special rules for the purposes of determining surpluses and deficits and underlying foreign tax balances of a foreign affiliate in the context of certain share transactions and corporate reorganizations.

Section 5905 currently serves two main objectives:

  • it requires, in specified circumstances, reductions to the surplus balances of a foreign affiliate of a corporation resident in Canada in respect of dividends arising because of elections by the corporation under subsection 93(1) of the Act in respect of a disposition of shares of a foreign affiliate, and
  • it resets, in specified circumstances, the surplus balances of a foreign affiliate of a corporation resident in Canada to reflect changes in the surplus entitlement of the corporation in respect of the affiliate.

Significant portions of sections 5902 and 5905 of the Regulations are being restructured in order to provide appropriate treatment of elections made under subsection 93(1.2) of the Act in respect of dispositions of shares of foreign affiliates by partnerships. In particular, the adjustments to surplus balances to reflect the deemed payment of dividends, under either subsection 93(1) or 93(1.2) of the Act, that are currently required to be made under various provisions of section 5905 (as per the first objective above), will now be made under a more general rule in section 5902. Certain of the remaining rules in section 5905 are also being restructured with a view to making them more user-friendly.

The following are the main provisions affected by this restructuring:

subsection 5902(1) -- replaced
subsection 5902(2) -- replaced
subsection 5902(3) -- repealed
subsection 5905(1) -- replaced
subsection 5905(2) -- repealed (consolidated with subsection 5905(1))
subsection 5905(3) -- replaced
subsection 5905(4) -- repealed (consolidated with subsection 5905(3))
subsection 5905(5) -- replaced
subsection 5905(5.1) -- added, to complement subsection 5905(5)
subsection 5905(6) -- repealed (consolidated with subsections 5905(5) and (5.1))
subsection 5905(8) -- repealed (consolidated with subsection 5905(1))
subsection 5905(9) -- repealed (consolidated with subsection 5905(1)). 

ITR
5902(1), (2) and (3)

Subsection 5902(1) provides rules to compute a foreign affiliate's surplus accounts, and the amount of a whole dividend, which are used in applying subsection 5901(1) for the purposes of subsection 5900(1) with respect to an elected dividend under subsection 93(1).

The existing features of subsection 5902(1) are unchanged, except for some language and structural improvements, but are now found entirely in paragraph (a). The main change to this subsection is the addition of paragraph (b) which takes over the surplus adjustment function currently performed by various provisions of section 5905 (as per the first objective above) and ensures that these adjustments will be made in all appropriate circumstances.

Subsection 5902(2) provides application rules for the purpose of subsection 5902(1). This subsection is amended by moving existing paragraphs (a) and (b) to subparagraphs (a)(i) and (ii) and by replacing paragraph (b) with the rule, currently found in various provisions of section 5905, that provides the meaning of "specified adjustment factor".

Subsection 5902(3) currently provides that no adjustments to surplus balances shall be made other than as specified in certain provisions of section 5905. As these adjustments will now be made in section 5902 and not in section 5905, this subsection is no longer necessary and is being repealed.

The amendments to subsections 5902(1) to (3) apply in respect of elections made in respect of dispositions that occur after December 18, 2009. However, the reference to subsection 93(1) of the Act in the current version of subsection 5902(1) will, by virtue of new paragraph 5908(8)(a), include a reference to subsection 93(1.2) for elections made in respect of dispositions that occur after November 1999. Also, subparagraph 5902(1)(a)(i) applies after December 18, 2009 to the extent it is used in determining a foreign affiliate's "tax-free surplus balance", by virtue of new subsection 5905(5.6).

The following example illustrates the application of amended sections 5902 and 5905.

Example

Assumptions

1. Canco, a corporation resident in Canada, owns all 100 shares of FA1, a foreign affiliate of Canco.

2. Canco disposes of 40 shares of FA1 to an arm's length party.

3. Immediately prior to the disposition, FA1 has an exempt surplus balance of $100 in respect of Canco and no other surplus balances.

4. Canco makes a subsection 93(1) election of $40 in respect of the 40 disposed shares of FA1.

Analysis

Section 5902

Subject to paragraph 5905(5)(c), paragraph 5902(1)(b) will require reductions to the surplus balances of a particular affiliate in respect of a corporation resident in Canada whenever a subsection 93(1) or, by virtue of paragraph 5908(8)(a), a subsection 93(1.2) election is made by the corporation resident in Canada, in connection with a disposition of shares of the affiliate. In this example, paragraph 5902(1)(b) will apply to the election and will require a reduction, immediately before the disposition, in FA1's exempt surplus in respect of Canco by the $40 elected exempt surplus dividend.

Subsection 5905(1)

Subsection 5905(1) requires adjustments (resets) to the surplus balances of a particular foreign affiliate in respect of a corporation resident in Canada whenever the corporation's surplus entitlement percentage in the affiliate changes as a result of an acquisition or disposition of shares of that affiliate or of any other affiliate that has an equity percentage in the particular affiliate. An exception is provided in the case of a transaction to which paragraph 5905(3)(a) or subsection 5905(5) or (5.1) applies.

The reset balances reflect the corporation's increased or reduced surplus entitlement percentage in the particular affiliate and the balances that will be reset are the balances at the time of the acquisition or disposition of shares – these balances will reflect, for example any adjustment made to the surplus balances under new paragraph 5902(1)(b).

In this example, Canco's surplus entitlement percentage in FA1 is 100% immediately prior to the disposition and is 60% immediately after the disposition. Accordingly, subsection 5905(1) resets FA1's exempt surplus balance in respect of Canco from the $60 balance (after the paragraph 5902(1)(b) adjustment) back to $100 ($60 x 100%/60%), and this $100 becomes FA1's "opening exempt surplus" in respect of Canco.

ITR
5902(6)(b)

Paragraph 5902(6)(b) of the Regulations is being amended as a consequence of the restructuring of subsection 5902(1) to change the reference to net surplus from paragraph 5902(1)(a) to subparagraph 5902(1)(a)(i).

This amendment applies in respect of elections made in respect of dispositions that occur after December 18, 2009.

Clause 42

Foreign Accrual Property Losses

ITR
5903

Subsection 95(1) of the Act defines FAPI of a foreign affiliate of a taxpayer. FAPI is reduced by variable F, which is currently described by reference to the "deductible loss" of the affiliate, as determined under section 5903 of the Regulations.

Under current section 5903, the deductible loss of a foreign affiliate includes FAPLs of the affiliate for each of the five immediately preceding taxation years. Current rules also ensure that FAPLs are included in the amount of the deductible loss of a foreign affiliate of a taxpayer only where the affiliate is a controlled foreign affiliate of the taxpayer, or of a person described in "old" subparagraphs 95(2)(f)(iv) to (vii) of the Act, during the year the loss was incurred. As well, current rules prevent active business losses from being part of a deductible loss of a foreign affiliate.

Section 5903 is being amended in a number of ways. These changes can generally be grouped into the following categories:

  • FAPL carryforward and carryback periods;
  • loss claim mechanics;
  • FAPL computation;
  • consequential amendments to reflect Budget 2007 Act changes.

ITR
5903(1)

Amended subsection 5903(1) allows a taxpayer to designate an amount for a particular year in respect of the FAPLs of the affiliate for the twenty taxation years immediately preceding the particular year and the three taxation years immediately following the particular year. Thus, amended subsection 5903(1) will both extend the FAPL carryforward period from 5 to 20 years and provide for a 3 year carryback. However, see below under "Application" for a discussion of the transitional rules.

ITR
5903(2)

Amended subsection 5903(2) does two main things. First, in paragraphs 5903(2)(a) and (b), it aligns the loss claim mechanics in respect of FAPLs more closely with the rules applicable to losses in a domestic context – those found in subsections 111(1) and 111(3) of the Act. Second, in paragraph 5903(2)(c), it provides for a group claim rule.

The group claim rule is a concept under which a designation by any "relevant person or partnership" of a FAPL of a particular affiliate will be deemed to be a designation of the taxpayer in respect of the affiliate. For example, if a particular affiliate is owned by both Canco 1 and Canco 2, and Canco 2 is a "relevant person or partnership" in respect of Canco 1, an amount of FAPL that is designated by Canco 2 will be deemed to have been designated by Canco 1 where Canco 1 does not itself make a designation. This group claim rule is aimed at preventing the duplication of losses through non-arm's length transfers of the shares of the foreign affiliate.

ITR
5903(3)

Amended subsection 5903(3) defines the FAPL of an affiliate of a taxpayer for a taxation year. Where, at the end of the taxation year, an affiliate is a controlled foreign affiliate of a relevant person or partnership in respect of the taxpayer (which includes the taxpayer), the FAPL of the affiliate is the amount, if any, by which the total of all amounts represented by variables D, E, G and H in the FAPI definition in subsection 95(1) of the Act exceeds the total of all amounts represented by variables A, A.1, A.2, B and C of that definition. The current rules only include variables A, B, C, D and E in the computation of a FAPL, under paragraph 5903(1)(a).

ITR
5903(4)

New subsection 5903(4) is substantively similar to existing paragraph 5903(1)(c). It is being amended as a consequence of the restructuring of section 5903 and to broaden its application to include foreign affiliates of a relevant person or partnership, as defined in new subsection 5903(6).

ITR
5903(5)

New subsection 5903(5) provides that a predecessor affiliate's FAPLs may flow through to a successor affiliate following a foreign merger or winding-up of one or more affiliates of a taxpayer provided the taxpayer's surplus entitlement percentage exceeds 90% in each predecessor affiliate and in the successor affiliate. New subsection 5903(5) is substantially similar to existing subsection 5903(3), except that new subsection 5903(5) does not contain the additional 90% surplus entitlement percentage condition for the loss accrual period that is currently found in the "post-amble" of current subsection 5903(3).

ITR
5903(6)

New subsection 5903(6) defines the expression "relevant person or partnership". The introduction of this new concept is consequential to the Budget 2007 Act changes that restructured paragraph 95(2)(f) of the Act, in particular the repeal of subparagraphs 95(2)(f)(iv) to (vii). The "relevant person or partnership" definition is a modified version of the "specified person or partnership" definition in subsection 95(1) of the Act, which is a key component of the so-called "carve-out" rule found in paragraph 95(2)(f.1) of the Act.

ITR
5903(7)

New paragraph 5903(7)(a) is similar to subsection 95(2.6) of the Act, and is an interpretation rule for the purpose of the "relevant person or partnership" definition in subsection 5903(6). New paragraph 5903(7)(b) does not have an analogous provision in the Act and applies only in the context of a carryback of a FAPL to a prior year. Essentially, both paragraphs of subsection 5903(7) attribute non-arm's length status to certain persons that do not exist contemporaneously.

Section 5903 generally applies for taxation years of foreign affiliates that begin after November 1999, however there are a number of exceptions. Most of these exceptions preserve the application of draft proposals issued in March 2001 for periods before December 18, 2009. Another key exception provides for a gradual transition of the FAPL carryforward period from the existing 5 years to 7 years then 10 and, finally, 20 years.

The following examples illustrate the application of certain aspects of new section 5903.

Example 1

The application of paragraph 5903(6)(d) in the context of a FAPL carryback is illustrated by the following example.

Assumptions

1. In year 1, Canco, a corporation resident in Canada, owns all the shares of Subco, another corporation resident in Canada, and all the shares of FA, a foreign affiliate of Canco.

2. FA earns FAPI of $1,000,000 in year 1 which is included in computing the income of Canco in accordance with section 91 of the Act.

3. In year 2, Newco, a corporation resident in Canada, is formed as a result of a vertical amalgamation of Canco and Subco.

4. FA incurs a FAPL of $1,000,000 in year 3.

Analysis

Under paragraph 5903(1)(b), Canco can designate in year 1 an amount of FAPL incurred by FA in the 3 following taxation years. However, under the definition of FAPL in subsection 5903(3), FA has to be a controlled foreign affiliate of a relevant person or partnership in respect of Canco at the end of year 3.

In the absence of new paragraph 5903(6)(d), Newco would not be a relevant person or partnership in respect of Canco at the end of year 3 since Canco is not considered to exist for the purposes of the Act and, therefore, it could not be said that Newco was not dealing at arm's length with Canco under paragraph (a) of that definition at the end of year 3. Also, Newco is not an antecedent corporation in respect of Canco, it is a successor.

Under new subsection 5903(6)(d), since Newco is, at the end of year 3, a corporation of which Canco is an antecedent corporation, Newco is a relevant person or partnership in respect of Canco in year 3. Consequently, Canco would be able to carry back the amount of FAPL realized by FA in year 3 to year 1.

Example 2

The application of paragraph 5903(7)(b) in the context of a FAPL carryback is illustrated by the following example.

Assumptions

1. In year 1, Canco 1, a corporation resident in Canada, owns all of the shares of Canco 2, another corporation resident in Canada, which in turn owns all of the shares of FA, a non-resident corporation. In year 1, FA earns FAPI of $1,000,000.

2. On January 1st of year 2, Amalco is formed as a result of a vertical amalgamation of Canco 1 and Canco 2.

3. On January 1 of year 3, Amalco forms Canco 3, a corporation resident in Canada, and transfers the shares of FA to Canco 3.

4. In year 3, FA realizes a FAPL of $1,000,000.

Analysis

Under subsection 5903(1), Canco 2 can designate in year 1 an amount that is the FAPL of FA for the 3 following taxation years. Under the definition of FAPL in subsection 5903(3), the $1,000,000 loss incurred by FA in year 3 would be a FAPL vis-à-vis Canco 2 only if FA is a controlled foreign affiliate of a relevant person or partnership in respect of Canco 2 at the end of year 3. At the end of year 3, FA is a controlled foreign affiliate of Canco 3.

In the absence of paragraph 5903(7)(b), Canco 3 would not be a relevant person or partnership in respect of Canco 2 at the end of year 3 under subsection 5903(6) as Canco 2 cannot be said to be non-arm's length with Canco 3 given that it did not exist at that time. Also, paragraph 5903(7)(a) cannot deem Canco 2 to be in existence and not to be dealing at arm's length with Canco 3 in year 3 because Canco 3 is not an antecedent corporation of Canco 1.

Paragraph 5903(7)(b) ensures that, because Amalco (the corporation of which Canco 2 – the "particular person" – is an antecedent corporation) was not dealing at arm's length with Canco 3 (the other person) at the end of year 3, Canco 2 is deemed to be in existence and not to be dealing at arm's length with Canco 3 at the end of year 3. As a result, Canco 3 is a relevant person or partnership in respect of Canco 2 at the end of year 3 under paragraph 5903(6)(a), which allows Canco 2 to apply the FAPL of year 3 to year 1.

Clause 43

Participating Percentage

ITR
5904

Section 5904 of the Regulations prescribes rules for subparagraph (b)(ii) of the definition "participating percentage" in subsection 95(1) of the Act. This definition is relevant for determining the amount to be included in FAPI under subsection 91(1) of the Act.

ITR
5904(3)

Subsection 5904(3) contains application rules for subsection 5904(2). Subsection 5904(2) determines the distribution entitlement of all shares of a foreign affiliate for the purpose of subsection 5904(1), the main operative rule in section 5904. Current paragraph 5904(3)(a) provides that the net surplus of a foreign affiliate of a taxpayer who is an individual shall be computed as if the individual were a corporation resident in Canada.

New paragraph 5904(3)(a) is being amended to clarify that it applies where the relevant shareholder for FAPI purposes is a partnership. This is accomplished by replacing the references to an individual with references to a "person resident in Canada".

Amended paragraph 5904(3)(a) applies to taxation years of a foreign affiliate that begin after November 1999.

Clause 44

Reorganizations

ITR
5905

Section 5905 of the Regulations provides special rules for the purposes of determining surpluses and deficits and underlying foreign tax balances of a foreign affiliate in the context of certain share transactions and corporate reorganizations. See the discussion under section 5902 for a more complete description of the current functions of section 5905 and a general description of certain proposed changes in respect thereof.

ITR
5905(1), (2), (8) and (9)

Subsections 5905(1), (2), (8) and (9) currently provide rules for resetting the amount of the exempt surplus or deficit, taxable surplus or deficit and underlying foreign tax, in respect of a corporation resident in Canada, of any particular foreign affiliate of the corporation (and, in general, of each other foreign affiliate of the corporation in which the particular affiliate has an equity percentage) in cases where the surplus entitlement percentage of the corporation in respect of the particular affiliate increases or decreases because of certain acquisitions, redemptions or issuances in respect of shares of the particular affiliate.

As noted above in the discussion under section 5902, the feature of some of these subsections that adjusts surplus balances as a result of subsection 93(1) adjustments is being moved to section 5902. The remaining aspects of these rules are being combined in new subsection 5905(1). Subsections (2), (8) and (9) are being repealed. Amended subsection 5905(1) will also adjust certain surplus balances in the context of a foreign merger, as described below under subsection 5905(3).

These amendments will apply for acquisitions and dispositions, and certain other more specific categories of transactions, that occur after December 18, 2009.

ITR
5905(3) and (4)

Current subsections 5905(3) and (4) provide for the establishment of opening surplus balances of a foreign affiliate of a corporation resident in Canada, and certain other corporations in which the foreign affiliate has an equity interest, where the affiliate has been formed as a result of a foreign merger.

These subsections, themselves, are being "merged" into one. The rules in current subsection 5905(4) are being moved into a new paragraph 5905(3)(b), and the functions of existing paragraph (b) will now be carried out by new paragraph (c) in combination with amended subsection 5905(1).  Subsection 5905(4) is thus being repealed.

In addition, new subparagraph 5905(3)(b)(ii) ensures that appropriate adjustments are made to the surplus balances of the merged affiliate where a subsection 93(1) election has been filed in respect of the merger.

These amendments will apply to foreign mergers that occur after December 18, 2009.

ITR
5905(5), (5.1) and (6)

Current subsections 5905(5) and (6) provide for the establishment of opening surplus balances of a foreign affiliate of a corporation resident in Canada, and certain other corporations in which the foreign affiliate has an equity interest, in cases where shares of the affiliate are transferred between certain non-arm's length Canadian corporations or become property of a Canadian corporation as a result of certain windings-up and amalgamations.

Subsections 5905(5) and (6) are being reconfigured so that new subsection 5905(5) will apply only to transfers of shares between non-arm's length Canadian corporations (including transfers occurring as a result of certain windings-up) and new subsection 5905(5.1) will apply only to cases where foreign affiliate shares become property of a merged entity as a result of an amalgamation governed by subsection 87(1) of the Act.

Subsection 5905(6) is being repealed, but its functions will be taken over by new paragraphs 5905(5)(b) and (c) in combination with amended section 5902, in the case of share transfers between non-arm's length Canadians, and by paragraph 5905(5.1)(b), in the case of amalgamations.

These amendments will apply to dispositions and amalgamations that occur, and windings-up that begin, after December 18, 2009.

ITR
5905(5.11) and (5.12)

Subsections 5905(5.11) and (5.12) are new rules that will apply for the purposes of existing subsections 5905(5) and (6), or new subsections 5905(5) and (5.1), where a corporation resident in Canada has claimed a so-called "bump" under paragraph 88(1)(d) of the Act in respect of a transfer, upon a winding-up governed by subsection 88(1) of the Act, of shares of a foreign affiliate or an interest in a partnership that holds shares of a foreign affiliate. By virtue of subsection 87(11), these bump rules can also apply in the context of certain amalgamations.

Where the conditions of subsection 5905(5.11) are met, subsection 5905(5.12) will restate the surplus balances of a relevant affiliate to reflect only the surplus it had, immediately before the wind-up or amalgamation, in respect of the parent corporation or new corporation, as the case may be. Any surplus accrued in respect of the subsidiary corporation, as defined in subsection 5905(5.11), will be eliminated.

These new subsections will apply in respect of an amalgamation that occurs, or a winding-up that begins, after February 27, 2004, except where the acquisition of control that precedes the amalgamation or winding-up occurs after December 18, 2009.

ITR
5905(5.13)

Subsection 5905(5.13) prescribes an amount for the purpose of new clause 88(1)(d)(ii)(B) of the Act. The rules in this subsection, combined with that clause, have the effect of limiting the amount of "bump" a taxpayer may claim in respect of shares of a foreign affiliate, or interests in a partnership that holds such shares, where the shares or interests, as the case may be, are transferred from a subsidiary corporation to its parent upon a winding-up governed by subsection 88(1) of the Act. By virtue of subsection 87(11), these bump limitation rules can also apply in the context of certain amalgamations.

The limitation under subsection 5905(5.13) is generally determined by reference to any dividends paid by the subsidiary to the parent, after the acquisition of control of the subsidiary by the parent, that are deductible under either paragraph 113(1)(a) or (b) of the Act and that do not relate to exempt or taxable surplus that arose after the parent last acquired control of the subsidiary.

This subsection applies to windings-up that begin, and amalgamations that occur, after February 27, 2004. However, it is important to note that where the acquisition of control that precedes the winding-up (or amalgamation) occurs after December 18, 2009, new subsection 5905(5.4) will apply instead of subsection 5905(5.13).

ITR
5905(5.2) and (5.3)

New subsection 5905(5.2) of the Regulations applies to foreign affiliates of a corporation resident in Canada that undergoes an acquisition of control. This rule is similar in concept to paragraph 111(4)(c) of the Act, which applies to reduce the adjusted cost base of certain capital property of a Canadian corporation to the extent it exceeds the fair market value of the property immediately before an acquisition of control. This new rule is, in part, consequential to the Budget 2007 Act changes, more specifically the new definition "designated acquired corporation" in subsection 95(1) of the Act.

New subsection 5905(5.2) applies to shares of foreign affiliates held directly by a Canadian resident corporation and, by virtue of the application of new subsections 5908(1) and (6) of the Regulations, to foreign affiliate shares held by a partnership of which such a corporation is a member. The general effect of the rule is to reduce the exempt surplus balance of the top foreign affiliate, i.e. the one held directly by the Canadian resident corporation or the partnership, as the case may be, to the extent the aggregate of the "tax-free surplus balance" of the affiliate and the adjusted cost base of the shares exceeds the fair market value of the shares at the time of acquisition of control. "Tax-free surplus balance" is a new term that derives its meaning from new subsections 5905(5.5) and (5.6). It is a measure of the "good" surplus inherent in the top affiliate and any affiliates in which the top affiliate has a direct or indirect interest. "Good" surplus is, generally, the aggregate of exempt surplus and the grossed-up amount of underlying foreign tax (i.e. taxes paid in respect of taxable surplus).

Because of the potential overlap between new subsection 5905(5.2) and subsection 111(4), a special ordering rule is provided in subsection 5905(5.3) to ensure that the adjusted cost base of the shares referred to in variable B of subsection 5905(5.2) is determined after taking into account any adjustments under subsection 111(4) of the Act.

These new subsections will apply in respect of acquisitions of control that occur after December 18, 2009, although "grandfathering" is provided for certain agreements in writing.

The following examples illustrate the intended operation of new subsection 5905(5.2).

Example 1

Assumptions

1. Can Target, a corporation resident in Canada, is a widely-held public company.

2. Can Target owns all 100 shares of FA1.

3. FA1 owns all of the shares of FA2.

4. Can Acquisition is an arm's length corporation resident in Canada.

5. On May 1st, 2010, Can Acquisition acquires all of the shares of Can Target for $2,000.

6. At the time of acquisition, the shares of FA1 have an adjusted cost base of $300 and a fair market value of $1,200.

7. At the time of acquisition, FA1 and FA2 each have an exempt surplus balance vis-à-vis Can Target of $700.

Analysis

Since there has been an acquisition of control of Can Target and it owns shares of a foreign affiliate, new subsection 5905(5.2) must be considered.

In this example, variable A in the formula is equal to FA1's "tax-free surplus balance" in respect of Can Target (because Can Target's surplus entitlement percentage in respect of FA1 is 100%). Tax-free surplus balance is defined in subsection 5905(5.5), but it is also important to refer to new subsection 5905(5.6) and subparagraph 5902(1)(a)(i). In this case, having regard to the latter provisions, FA1's tax-free surplus balance is the aggregate of FA1's and FA2's exempt surplus balances in respect of Can Target, or $1,400.

Variable B is simply Can Target's cost amount, or adjusted cost base, of the FA1 shares, or $300.

In this example, because there is no partnership in the ownership structure, variable C is simply the aggregate fair market value of the FA1 shares, or $1,200.

Variable D is 100%, as noted above.

Thus, because A + B exceeds C, or in words, the total of the tax-free surplus balance and the adjusted cost base of the shares exceeds the fair market value of the shares, a reduction will be required to FA1's exempt surplus balance vis-à-vis Can Target. The amount of the reduction is $500 ((1,400 + 300 – 1,200)/100%).

Example 2

Assumptions

Same as Example 1 except that Can Target's shares of FA1 are held through a partnership of which Can Target owns 90% of the member interests, and the partnership's adjusted cost base of the FA1 shares is $300. Also, it is assumed that FA1 has never paid a dividend.

Analysis

Since new subsection 5908(1) applies for the purposes of section 5905, Can Target will, for the purposes of subsection 5905(5.2), be considered to own 90 shares of FA1.

In this example, variable A in the formula is $1,400 x 90% (Can Target's surplus entitlement percentage in respect of FA1), or $1,260.

For variable B, pursuant to paragraph 5908(6)(a), Can Target's cost amount of the shares of FA1 is $270 (300 x 90/100).

For variable C, as FA1 has never paid a dividend, paragraph 5908(6)(b) has no application and C is simply the fair market value of the 90 shares deemed owned, which is $1,200 x 90/100, or $1,080.

As Can Target is deemed to own only 90 shares in this example, variable D is 90%.

In this example, the reduction to FA1's exempt surplus is also $500 ((1,260 + 270 – 1,080)/90%), but Can Target, effectively, only has a reduction of 90% of that $500.

ITR
5905(5.4)

Subsection 5905(5.4) prescribes an amount for the purpose of new clause 88(1)(d)(ii)(B) of the Act. The rules in this subsection, combined with that clause, have the effect of limiting the amount of "bump" a taxpayer may claim in respect of shares of a foreign affiliate, or interests in a partnership that holds such shares, where the shares or interests, as the case may be, are transferred from a subsidiary corporation to its parent upon a winding-up governed by subsection 88(1) of the Act. By virtue of subsection 87(11), these bump limitation rules can also apply in the context of certain amalgamations.

Subsection 5905(5.4) is different in design than the rule in subsection 5905(5.13) that it replaces. Subsection 5905(5.4) looks to the attributes of the foreign affiliate at the time of acquisition of control rather than at the time of the winding-up or amalgamation. By adding an additional limitation amount reflecting the "tax-free surplus balance" of the affiliate, subsection 5905(5.4) makes it such that a paragraph 88(1)(d) bump will only be available to the extent the fair market value of the affiliate's shares at the time of acquisition of control exceeds the aggregate of the adjusted cost base of the shares and the "good" surplus of the affiliate. Subsection 5905(5.4) thus has some similar elements to new subsection 5905(5.2). In fact, where subsection 5905(5.2) has applied to a foreign affiliate upon an acquisition of control, it should be the case that no bump would be available in respect of the shares of the affiliate.

Subsection 5905(5.4) applies to a share of a foreign affiliate held directly by a Canadian resident corporation and to such a corporation's interest in a partnership that holds such shares. In the case of a partnership interest, regard must also be had to new subsection 5908(7).

This new subsection applies in respect of acquisitions of control that occur after December 18, 2009, although "grandfathering" is provided for certain agreements in writing.

The following examples illustrate the intended operation of new subsection 5905(5.4).

Example 1

Assumptions

Assume the same facts as for Example 1 under subsection 5905(5.2) above except also assume that Can Target is, immediately after the takeover, wound-up into Can Acquisition.

Analysis

Paragraph 5905(5.4)(a) is the relevant paragraph in this example.

In this example, variable A in the formula is equal to FA1's tax-free surplus balance in respect of Can Target determined at the time of acquisition of control. As the adjustment to FA1's exempt surplus balance under subsection 5905(5.2) occurs immediately before the acquisition of control, variable A would be $1,400 less the $500 reduction under subsection 5905(5.2), or $900.

Variable B is 1% for each share of FA1 (all 100 shares are owned by Can Target).

Thus, for each share of FA1 owned by Can Target an additional amount of $9 will be prescribed for purposes of the bump limitation in subparagraph 88(1)(d)(ii) of the Act. The result under that subparagraph is that no bump is available for any share of FA1 as there is no excess of the fair market value of $12 over the cost amount of each share ($3) plus the prescribed amount ($9).

Example 2

Assumptions

1. Can Target, a corporation resident in Canada, is a widely-held public company.

2. Can Target owns an 80% interest (based on relative fair market values) in partnership P1.

3. P1 owns 100 common shares of FA1. (The common shares are the only issued shares of FA1.)

4. Can Acquisition is an arm's length corporation resident in Canada.

5. On May 1st, 2010, Can Acquisition acquires all of the shares of Can Target for $3,000.

6. At the time of acquisition, the fair market value of Can Target's interest in P1 is $2,000.

7. Can Target's cost amount of its interest in P1 is $80.

8. At the time of acquisition, FA1 has exempt surplus vis-à-vis Can Target of $1,000.

Analysis

Paragraph 5905(5.4)(b) is the relevant paragraph in this example, and thus regard must be had to subsection 5908(7).

Variable A in subsection 5908(7) is simply $1,000 (FA1's exempt surplus is the same as its tax-free surplus balance in this case).

Under subsection 5908(1), Can Target is deemed to own 80 shares of FA1. Variable B in subsection 5908(7) is thus 80% (80 /100), and the amount determined by subsection 5908(7) is $800 (1,000 x 80%).

As such, an additional amount of $800 will be prescribed under paragraph 5905(5.4)(b) for the purposes of the bump limitation in subparagraph 88(1)(d)(ii) of the Act, with the result that the bump limitation for Can Target's interest in P1 will be $1,120, being the excess of the fair market value of the interest ($2,000) over the aggregate of the cost amount of the interest ($80) and the prescribed amount ($800).

ITR
5905(5.5) and (5.6)

New subsections 5905(5.5) and (5.6) of the Regulations provide the meaning of the term "tax-free surplus balance" for the purposes of new subsections 5905(5.2), (5.4) and, as discussed below, subsections 5905(7.2) and (7.3).

The "tax-free surplus balance" of a particular foreign affiliate is defined in subsection 5905(5.5) and is a measure of the "good" surplus inherent in the particular affiliate. "Good" surplus is, generally, the aggregate of exempt surplus and the grossed-up amount of underlying foreign tax (i.e. taxes paid in respect of taxable surplus).

Subsection 5905(5.6) provides that, for the purpose of subsection 5905(5.5), the surplus balances of the particular affiliate include its share of the surplus balances of any foreign affiliates in which the particular affiliate has a direct or indirect interest. This is accomplished by reference to the surplus aggregation rule in amended subparagraph 5902(1)(a)(i).

These new subsections will apply after December 18, 2009.

ITR
5905(7.1) to (7.7)

The foreign affiliate regime has, from the outset, been designed to make it such that deficits in upper-tier affiliates (so-called "blocking deficits") would need to be filled-in with surpluses from lower-tier affiliates before an upper-tier affiliate can distribute tax deductible dividends to its Canadian corporate shareholders. This design feature has been relied upon in a long-established policy under which, in the context of the adjustments to surplus balances that result from a subsection 93(1) election, only the balances of the top-tier affiliate are adjusted – a significant compliance-saving measure. This same design feature is being relied upon in the design of new subsection 5905(5.2) where, again, the surplus adjustments happen only at the level of the top-tier affiliate. Subsections 5905(7.1) to (7.7) introduce new rules to deal with transactions that have the effect of circumventing blocking deficits.

Subsection 5905(7.2) is the main operative rule in this series of rules (referred to in these notes as the "fill-the-hole" rule). By virtue of subsection 5905(7.1), subsection 5905(7.2) will apply where a foreign affiliate, i.e. an upper-tier affiliate, of a corporation resident in Canada has an exempt deficit and any shares of a lower-tier affiliate, i.e. one that is lower in the chain than the upper-tier affiliate, are acquired by the corporation or another foreign affiliate in circumstances where the upper-tier affiliate's interest in the lower-tier affiliate is diluted. It is intended that the conditions in subsection 5905(7.1) capture acquisitions of shares of a lower-tier affiliate upon the winding-up of an upper-tier affiliate, as well as dispositions, and issuances, of shares of lower-tier affiliates.

Where the conditions of subsection 5905(7.1) are met, subsection 5905(7.2) applies to achieve a result comparable with the result that would have occurred had a dividend been paid, immediately before the targeted transactions, to the extent necessary to "fill the hole" in the deficit affiliate. This is effected by the reduction, under paragraph 5905(7.2)(a), of the exempt surplus balance of the lower-tier affiliate and the reduction, under paragraph 5905(7.2)(b), of the exempt deficit balance of the upper-tier affiliate.

The amount of these reductions is, essentially, the lesser of the "tax-free surplus balance" of the lower-tier affiliate and the exempt deficit of the upper-tier affiliate. "Tax-free surplus balance" is the same concept that is used for new subsections 5905(5.2) and (5.4) and its meaning is derived by reference to new subsections 5905(5.5) and (5.6).

A special rule in subclause 5905(7.2)(a)(ii)(B)(I) deals with cases where there is more than one lower-tier affiliate, for example where an upper-tier affiliate distributes shares of two or more affiliates to its shareholder in the course of a winding-up. Where this is the case, taxpayers may designate which affiliates the surplus adjustments apply to and the respective quanta thereof. However, subsections 5905(7.3) and (7.4) contain rules aimed at ensuring that the aggregate amount of designations is not less than the lesser of the upper-tier affiliate's exempt deficit and the aggregate amount of the tax-free surplus balances of the lower-tier affiliates. If a taxpayer does not designate appropriate amounts, the Minister of National Revenue will determine the amounts designated for these purposes.

In keeping with the notional dividend concept that is inherent in the fill-the-hole rule, subsections 5905(7.5) and (7.6) provide for increases to the adjusted cost base of shares of lower-tier affiliates as well as the shares of any other affiliates in between the upper-tier and lower-tier affiliates. The premise relates to the dividend analogy. If lower-tier affiliates were deemed to pay dividends and thus had their exempt surplus reduced but their assets remained unchanged, it would be reasonable to assume that the dividends were reinvested in their shares. New subsection 5908(11) of the Regulations provides for situations where partnerships exist between the upper and lower-tier affiliates. These rules increase the adjusted cost base of the shares of a lower-tier affiliate held by a partnership (in paragraph 5908(11)(a)) as well as the partnership interest itself (in paragraph 5908(11)(b)). There is also a rule in paragraph 5908(11)(c) that ensures that no increase is made to the adjusted cost base of any lower-tier affiliate shares that are deemed (under subsection 5908(1) of the Regulations) to be owned by a member of a partnership.   

These new cost base adjustment rules are enabled by the amendment of paragraph 53(1)(d) of the Act and paragraph 5908(10)(a) (formerly paragraph 5907(12)(a)) of the Regulations and the addition of new subsection 92(1.1) of the Act.

New subsection 5905(7.7) prescribes, by reference to these cost base adjustment rules, the amounts for paragraph 93(3)(c) of the Act that are treated as "exempt dividends" for the purposes of the foreign affiliate stop-loss rules in subsections 93(2) to (2.3) of the Act.

These new subsections apply where a share of the capital stock of a foreign affiliate is acquired by, or otherwise becomes property of, a person after December 18, 2009.

The following examples illustrate the new "fill-the-hole" rule.

Example 1

Assumptions

1. Canco, a corporation resident in Canada owns all 100 shares of FA1, a foreign affiliate of Canco.

2. FA1 owns all 100 shares of FA2, a foreign affiliate of Canco.

3. FA1 is wound-up such that all 100 shares of FA2 are distributed to Canco.

4. Immediately before the wind-up:

  • FA1 has an exempt deficit of $1,000; and
  • FA2 has exempt surplus of $1,000.

Analysis

Subsection 5905(7.2) applies because:

  • FA1 has an exempt deficit (which makes it the "deficit affiliate");
  • shares of FA2 (the "acquired affiliate"), in which FA1 has an equity percentage, are acquired by Canco (the corporation).

Under paragraph 5905(7.2)(a), FA2's exempt surplus is reduced to nil 3 instants in time, or "nanoseconds", before the acquisition.

Under paragraph 5905(7.2)(b), FA1's exempt deficit is reduced to nil immediately after the acquisition.

As a result of subsection 5905(7.6) and paragraphs 53(1)(d) and 92(1.1)(a) of the Act, the adjusted cost base of the FA2 shares to FA1 is increased by $1,000 3 nanoseconds before the acquisition, i.e. the same time as the exempt surplus adjustment under paragraph 5905(7.2)(a).

Example 2

Assumptions

1. Canco owns 100% of the shares of Cansub; Canco and Cansub are corporations resident in Canada.

2. Cansub owns 100% of the shares of FA Holdco (ACB $1,000).

3. FA Holdco owns 100% of the shares of FA1 (ACB $1,000) and FA6 (ACB $0).

4. FA1 owns 100 common shares (100%) of FA2 (ACB $0). FA2 has issued only common shares.

5. FA2 owns 80 common shares (80%) of FA3 (ACB $0). FA3 has issued only common shares.

6. FA3 owns 50 common shares (50%) of FA4 (ACB $300; FMV $1,200). FA4 has issued only common shares.

7. FA4 owns 100% of the shares of FA5.

8. On January 1, 2010 (the "acquisition time"), FA3 sells its 50 FA4 shares to FA6 for cash of $1,200.

9. Immediately before the acquisition time:

  • FA1 has an exempt deficit balance of $1,000 and no other surplus balances;
  • FA2 has no surplus balances;
  • FA3 has an exempt surplus balance of $300 and no other surplus balances;
  • FA4 has an exempt surplus balance of $900 and no other surplus balances; and
  • FA5 has an exempt surplus balance of $1,000 and no other surplus balances.

Analysis

Subsection 5905(7.2)

On the sale of the FA4 shares to FA6, subsection 5905(7.2) would apply since the 2 conditions of subsection 5905(7.1) are met:

  • there is a foreign affiliate that has a deficit – FA1 (the "deficit affiliate"); and
  • shares of a foreign affiliate (FA4) in which the deficit affiliate (FA1) has an equity percentage are acquired by another foreign affiliate (FA6) of Cansub, and FA1's deemed surplus entitlement percentage in FA4 immediately after the acquisition time is less than it was immediately before the acquisition time (0% after; 40% before).

In this example, the amount determined under subparagraph 5905(7.2)(a)(i) is $2,500, being FA1's grossed up exempt deficit ($1,000/40%).

Since there is only one acquired affiliate, the amount determined under subparagraph 5905(7.2)(a)(ii) is $1,900, being FA4's tax-free surplus balance of $1,900 (FA4's exempt surplus of $900 plus FA5's exempt surplus of $1,000).

The amount determined under paragraph 5905(7.2)(a) is $1,900 (i.e. the lesser of 2,500 and 1,900), and the exempt surplus balance of FA4 is reduced, under paragraph 5905(7.2)(a), by $1,900 (creating an exempt deficit balance of $1,000 in FA4) at the time that is immediately before the time that is immediately before the time that is immediately before the acquisition time (i.e. 3 "nanoseconds" before the acquisition time).

Under subsection 5905(7.2)(b), the exempt deficit of FA1 is, immediately after the acquisition time, reduced by $760 ($1,900 x 40%) to $240.

Subsections 5905(7.5) and (7.6)

Subsection 5905(7.6) would apply since the conditions of subsection 5905(7.5) are met: subsection 5905(7.2) applies in respect of FA4, and each of FA1 (the "deficit affiliate"), FA2 and FA3 have an equity percentage in FA4 (the acquired affiliate).

Under paragraph 5905(7.5)(b):

  • FA1 is the "direct holder" with respect to the shares of FA2 (a "subject affiliate");
  • FA2 is the "direct holder" with respect to the shares of FA3 (a "subject affiliate"); and
  • FA3 is the "direct holder" with respect to the shares of FA4 (a "subject affiliate" and the "acquired affiliate").

Under paragraph 5905(7.6), for the purposes of paragraph 92(1.1)(a) of the Act, in computing on or after the adjustment time:

  • the ACB of the FA4 common shares held by FA3, the ACB would, in the aggregate, be increased by $950 ( $1,900 – the paragraph 5905(7.2)(a) amount – x 50% – FA3's deemed surplus entitlement percentage in FA4). After this increase, FA3's ACB in the shares of FA4 would be $1,250 ($300 + $950);
  • the ACB of the FA3 common shares held by FA2, the ACB would, in the aggregate, be increased by $760 ( $1,900 x 40% – FA2's deemed surplus entitlement percentage in FA4). After this increase, FA2's ACB in the shares of FA3 would be $760; and
  • the ACB of the FA2 common shares held by FA1, the ACB would, in the aggregate, be increased by $760 ( $1,900 x 40% – FA1's deemed surplus entitlement percentage in FA4). After this increase, FA1's ACB in the shares of FA2 would be $760.

Paragraph 93(3)(c)

At the time of the sale of the FA4 shares by FA3, the ACB of these shares is $1,250 and FA3's resulting capital loss would be $50. However, if the shares of FA3 are not excluded property, the otherwise determined loss of $50 would be deemed to be nil as a result of the interaction of new paragraph 93(3)(c) of the Act, subsection 93(2) of the Act, and subsection 5905(7.7).

Subsection 5905(1)

There is an increase in Cansub's surplus entitlement percentage in FA4 and FA5 as a result of the acquisition of the FA4 shares by FA6. Subsection 5905(1) would apply to reduce both FA4's exempt deficit balance (after the above paragraph 5905(7.2)(a) adjustment) and FA5's exempt surplus balance.

Clause 45

Permanent Establishments

ITR
5906

Section 5906 of the Regulations provides rules for determining the location of an active business carried on by a foreign affiliate of a corporation resident in Canada, for the purposes of Part LIX of the Regulations.

ITR
5906(2) and (3)

Subsection 5906(2) of the Regulations currently defines the term "permanent establishment" for the purpose of subsection 5906(1) – the main operative rule in section 5906.

Subsection 5906(2) is being amended to broaden its scope of application. It is also being amended such that it, together with new subsection 5906(3), will provide section 5906 with a more comprehensive definition of the term "permanent establishment". These amendments ensure that a common definition of "permanent establishment" applies for all purposes of Part LIX of the Regulations and, by virtue of new paragraph 5906(2)(b) and the new definition "permanent establishment" in subsection 95(1) of the Act, for purposes of the foreign affiliate provisions in subdivision i of Division B of Part I of the Act.

New paragraph 5906(2)(a) defines the term "permanent establishment" for the purposes of paragraph 5906(1)(a) and the definition "earnings" in subsection 5907(1). New subparagraph 5906(2)(a)(i) defines "permanent establishment" based on a tax treaty, if any, that Canada has in place with the country in which the business is considered (without reference to section 5906) to be carried on. New subparagraph 5906(2)(a)(ii) applies where there is no relevant tax treaty definition and provides, when considered together with subsection 5906(3), rules similar to subsection 400(2) of the Regulations (with the notable exception of paragraph (e.1) thereof) to define "permanent establishment". Although new subparagraph 5906(2)(a) replaces existing subsection 5906(2), it is not intended to have any substantive effect.

New paragraph 5906(2)(b) defines the term "permanent establishment" for the purposes of subdivision i of Division B of Part I of the Act (more particularly for the purposes of the definitions "investment business" and "non-qualifying business" in subsection 95(1), subparagraph 95(2)(l)(iii), paragraphs 95(2)(w), 95(2.3)(b) and 95(2.4)(a) and the definitions "excluded income and excluded revenue" and "indebtedness" in subsection 95(2.5) of the Act). This definition is essentially the same as the one in paragraph 5906(2)(a), but the tax treaty aspect of the rule is focused on the tax treaty under which the relevant person is resident, rather than the tax treaty for the country in which the business is carried on.

These amendments generally apply for taxation years of a foreign affiliate that end after 1999. However, a transitional reading applies in respect of the definition "excluded income and excluded revenue" in subsection 95(2.5) of the Act in order to coordinate these amendments with an amendment to section 8201 of the Regulations.

Clause 46

Interpretation

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5907

Section 5907 of the Regulations provides definitions and rules of interpretation for the purposes of Part LIX of the Regulations and also prescribes certain rules for particular foreign affiliate provisions of the Act.

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5907(1)

Subsection 5907(1) of the Regulations provides definitions for the purposes of Part LIX of the Regulations.

"loss"

The definition "loss" is relevant for the purposes of computing the surpluses and deficits of a foreign affiliate.

Consequential to the Budget 2007 Act changes to paragraph 95(2)(a) of the Act, the definition "loss" is being amended by changing the layout of the provision and by adding new paragraph (b) that ensures that "loss" will reflect all loss amounts required by paragraph 95(2)(a) to be included in computing a foreign affiliate's income or loss from an active business.

This amendment applies to taxation years of a foreign affiliate that end after 1999. However, this amendment may have earlier application where an election referred to in clause 50 is filed.

"earnings"

The definition "earnings" in subsection 5907(1) is relevant for the purposes of computing the surpluses and deficits of a foreign affiliate. Paragraph (b) of the definition "earnings" ensures that "earnings" will reflect the total of all amounts by which the affiliate's income for the year from an active business is increased because of paragraph 95(2)(a) of the Act.

Paragraph (b) of the definition "earnings" is being amended to ensure that "earnings" will reflect all income amounts required by paragraph 95(2)(a) to be included in computing a foreign affiliate's income or loss from an active business. This change is consequential to the Budget 2007 Act changes.

This amendment applies to taxation years of a foreign affiliate that end after 1999. However, this amendment may have earlier application where an election referred to in clause 50 is filed.

"exempt earnings"

The definition "exempt earnings" is relevant for the purposes of computing the exempt surplus and exempt deficit of a foreign affiliate.

This definition is being amended in a number of ways, as described below.

"exempt earnings" subparagraph (a)(ii)

Subparagraph (a)(ii) is being amended to include references to taxable capital gains that are described in new subparagraphs (e)(i) and (f)(iv) of the definition "net earnings". This amendment ensures that there is included, in computing "exempt earnings", only the non-taxable portion of capital gains realized in respect of dispositions of excluded property referred to in paragraphs (c) and (c.1) of the definition "excluded property" in subsection 95(1) of the Act where that excluded property relates to active business income that has its source in a non-designated treaty country. 

This amendment is consequential to the Budget 2007 Act changes in respect of the definition "excluded property" in subsection 95(1) of the Act.

This amendment applies in respect of dispositions of property that occur after December 18, 2009.

"exempt earnings" paragraph (a.1)

The definition "exempt earnings" is also being amended by adding new paragraph (a.1). This new paragraph includes in exempt earnings, in certain circumstances, the untaxed portion of income realized by a foreign affiliate from the receipt of an amount in respect of eligible capital property. It applies where the income relates either to a business of the affiliate that is not an active business or to a business that is an active business but whose "earnings", as defined in subsection 5907(1), are determined under subparagraph (a)(iii) of that definition (i.e. using Canadian tax rules). It would apply, for example, to a disposition of intellectual property that is eligible capital property used in carrying on an investment business of a foreign affiliate.

This new paragraph is meant to provide consistent treatment for non-taxable amounts in respect of capital property and eligible capital property.

This new paragraph applies to taxation years of a foreign affiliate that begin after December 20, 2002, except that the description of A in this new paragraph is, for taxation years of the affiliate that begin on or before December 18, 2009, to be read without reference to subparagraph (iii). This amendment may have earlier application where an election referred to in clause 50 is filed.

"exempt earnings" pre-amble of paragraph (d)

Paragraph (d) of the definition "exempt earnings" in subsection 5907(1) of the Regulations includes in a foreign affiliate's "exempt earnings" for a taxation year certain income of the affiliate for the year where the affiliate is resident in a designated treaty country.

The "preamble" of paragraph (d) is amended to require that the affiliate be resident in a designated treaty country throughout the taxation year. However, there is a new rule in subsection 5907(1.02) of the Regulations that deems, in certain circumstances, a foreign affiliate to meet this "throughout the year" requirement in the year in which it becomes a foreign affiliate.

This amendment applies for taxation years of a foreign affiliate that begin after December 18, 2009.

"exempt earnings" subparagraph (d)(ii)

Income of a foreign affiliate that would otherwise be its income from property but is recharacterized under paragraph 95(2)(a) of the Act to be its income from an active business is included by subparagraph (d)(ii) of the definition "exempt earnings" in subsection 5907(1) of the Regulations in computing its "exempt earnings" if the affiliate meets the residence requirement in the preamble of paragraph (d) (i.e. it must be resident in a designated treaty country) and the recharacterized income meets the conditions set out in the relevant clause of subparagraph (d)(ii). A major aspect of the conditions in the relevant clause is the existence of a sufficient connection between the recharacterized income and active business income that has its source in a designated treaty country.

Consequential to changes to paragraph 95(2)(a) that were made as part of the Budget 2007 Act changes, significant amendments are being made to subparagraph (d)(ii) of the definition "exempt earnings". These amendments can be grouped into the following categories:

  • amendments to replace references to "income" with references to "income or loss";
  • amendments to reflect the repeal of former clause 95(2)(a)(ii)(A) of the Act and the elimination in other provisions of paragraph 95(2)(a) of the ability to have income recharacterized by reference to activities and payments of related non-resident corporations;
  • amendments to reflect changes to clause 95(2)(a)(ii)(D) of the Act;
  • amendments to reflect the addition of subparagraphs 95(2)(a)(v) and (vi) of the Act;
  • other miscellaneous amendments.

In addition, the presentation of the individual clauses of subparagraph (d)(ii) is being simplified in that the conditions in the corresponding provisions of paragraph 95(2)(a) of the Act are, to the extent possible, no longer being repeated within subparagraph (d)(ii). This is aimed at making subparagraph (d)(ii) more user-friendly.

The amendments to subparagraph (d)(ii) apply to taxation years of a foreign affiliate that end after 1999, but there are a number of transitional provisions. In addition, some transitional provisions may have earlier application where an election referred to in clause 50 is filed.

As a result of these amendments, clauses (A) to (K) of the current version of subparagraph (d)(ii) are being replaced by:

  • clauses (A) to (I) in that subparagraph as it reads in its "go-forward version" (i.e., the version applicable for foreign affiliate taxation years that begin after 2008), and
  • clauses (A) to (J) in that subparagraph as it reads for the transitional periods.

The following table provides a concordance in respect of the old version, the transitional version and the go-forward version of the relevant provisions of paragraph 95(2)(a) of the Act and the old/current, transitional and go-forward versions of the corresponding clauses in subparagraph (d)(ii) of the definition "exempt earnings" in subsection 5907(1) of the Regulations.

Provision in paragraph 95(2)(a) of the Act (per that paragraph as it read prior to enactment of the Budget 2007 Act changes) Clause in subparagraph (d)(ii) of the definition "exempt earnings"(as that subparagraph reads prior to enactment of the regulatory amendments proposed herein) Provision in paragraph 95(2)(a) of the Act (per the transitional versions of that paragraph) Clause in subparagraph (d)(ii) of the definition "exempt earnings" (per the transitional version of that subparagraph) Provision in paragraph 95(2)(a) of the Act (per the Budget 2007 Act changes) for foreign affiliate taxation years that begin after 2008 Clause in subparagraph (d)(ii) of the definition "exempt earnings" for foreign affiliate taxation years that begin after 2008
95(2)(a)(i) (A) and (B) 95(2)(a)(i) (A) 95(2)(a)(i) (A)
95(2)(a)(ii)(A) (C) and (D) 95(2)(a)(ii)(A) (B) repealed -
- - - - 95(2)(a)(ii)(A) being former 95(2)(a)(ii)(E) (B)
95(2)(a)(ii)(B) (E) and (F) 95(2)(a)(ii)(B) (C) 95(2)(a)(ii)(B) (C)
95(2)(a)(ii)(C) (G) 95(2)(a)(ii)(C) (D) 95(2)(a)(ii)(C) (D)
95(2)(a)(ii)(D) (H) 95(2)(a)(ii)(D) (E) 95(2)(a)(ii)(D) (E)
95(2)(a)(ii)(E) (I) 95(2)(a)(ii)(E) (F) renumbered per Budget 2007 as 95(2)(a)(ii)(A) -
95(2)(a)(iii) (J) 95(2)(a)(iii) (G) 95(2)(a)(iii) (F)
95(2)(a)(iv) (K) 95(2)(a)(iv) (H) 95(2)(a)(iv) (G)
- - 95(2)(a)(v) – new (I) 95(2)(a)(v) – new (H)
- - 95(2)(a)(vi) – new (J) 95(2)(a)(vi) – new (I)

"exempt loss"

The definition "exempt loss" is relevant for the purposes of computing the exempt surplus and exempt deficit of a foreign affiliate.

This definition is being amended in a number of ways, as described below.

"exempt loss" subparagraph (a)(ii)

Subparagraph (a)(ii) is being amended to include references to allowable capital losses that are described in new subparagraphs (e)(i) and (f)(iv) of the definition "net loss" in subsection 5907(1) of the Regulations. This amendment ensures that there is included, in computing "exempt loss", only the non-deductible portion of capital losses incurred in respect of dispositions of excluded property referred to in paragraphs (c) and (c.1) of the definition "excluded property" in subsection 95(1) of the Act where that excluded property relates to active business income that has its source in a non-designated treaty country.

This amendment is consequential to the Budget 2007 Act changes in respect of the definition "excluded property" in subsection 95(1) of the Act.

This amendment applies in respect of dispositions of property that occur after December 18, 2009.

"exempt loss" paragraph (a.1)

The definition "exempt loss" is also being amended by adding new paragraph (a.1). This new paragraph includes in "exempt loss", in certain circumstances, the non-deductible portion of eligible capital expenditures. It applies where the expenditure relates either to a business of the affiliate that is not an active business or to a business that is an active business but whose "earnings", as defined in subsection 5907(1), are determined under subparagraph (a)(iii) of that definition (i.e. using Canadian tax rules). This amendment is similar to the addition of paragraph (a.1) of the definition "exempt earnings", but deals with amounts not deducted from income rather than amounts not included in income.

This new paragraph applies to taxation years of a foreign affiliate that begin after December 18, 2009.

"exempt loss" paragraph (c)

Paragraph (c) of the definition "exempt loss" in subsection 5907(1) of the Regulations includes in a foreign affiliate's "exempt loss" for a taxation year certain losses of the affiliate for the year where the affiliate is resident in a designated treaty country.

Consequential to the Budget 2007 Act changes made to paragraph 95(2)(a) of the Act and to the amendments being made to the "preamble" of paragraph (d) and to subparagraph (d)(ii) of the definition "exempt earnings" in subsection 5907(1) of the Regulations, paragraph (c) of the definition "exempt loss" is being restructured to add a new provision, found in its new subparagraph (ii), that ensures that losses recharacterized under paragraph 95(2)(a) of the Act are, in appropriate circumstances, included in "exempt loss".

New subparagraph (c)(ii) of the definition "exempt loss" mirrors subparagraph (d)(ii) of the definition "exempt earnings" and is directly referenced thereto. In addition to new paragraph (c)(ii), the preamble of paragraph (c) is being amended, similar to the amendment to the preamble of paragraph (d) of the "exempt earnings" definition, to require that a foreign affiliate be resident in a designated treaty country throughout the year. However, there is a new rule in subsection 5907(1.02) of the Regulations that deems, in certain circumstances, a foreign affiliate to meet this "throughout the year" requirement in the year in which it becomes a foreign affiliate.

The amendments to paragraph (c) of the definition "exempt loss" apply to taxation years of a foreign affiliate that end after 1999, except that the "throughout the year" requirement in the preamble applies only to taxation years that begin after December 18, 2009. In addition, the amendments to paragraph (c), other than the "throughout the year" requirement, may have earlier application where an election referred to in clause 50 is filed.

"exempt surplus"

The definition "exempt surplus" is primarily relevant for the purposes of determining the deductibility of dividends received from a foreign affiliate, pursuant to subsections 5900(1) of the Regulations and subsection 113(1) of the Act.

Various amendments are being made to the definition "exempt surplus". Some of these amendments restructure certain aspects of the definition in order to allow more flexibility in picking up appropriate references to the provisions of sections 5902 and 5905 as they may be amended from time to time. A new subparagraph (vi.1) has also been added under variable A in order to allow for adjustments that arise from the new fill-the-hole rule in subsection 5905(7.2) and the elective transitional rules (as contemplated by clause 51 of these amendments) in subsections 5905(2), (4), (6) and (8) relating to the consolidated net surplus regime.

For detail about the amendments being made to sections 5902 and 5905, refer to the commentary for those sections.

These amendments generally apply after November 1999, except that new subparagraph (vi.1) of variable A generally applies to acquisitions and dispositions of foreign affiliate shares that occur after December 20, 2002.

"net earnings" and "net loss"

The definitions "net earnings" and "net loss" are relevant for the purposes of computing the surpluses and deficits of a foreign affiliate.

These definitions are being amended by adding new paragraphs (e) and (f) to each of them. These amendments are consequential to the Budget 2007 Act changes that introduced a replacement paragraph (c) and a new paragraph (c.1) to the definition of "excluded property" in subsection 95(1) of the Act.

New paragraphs (e) and (f) of the definition "net earnings" ensure that, in certain circumstances, taxable capital gains (net of income or profits tax) from the disposition of excluded property referred to in paragraph (c) or (c.1) of the "excluded property" definition are included in computing a foreign affiliate's "taxable earnings" and, ultimately, "taxable surplus" or "taxable deficit".

Similarly, new paragraphs (e) and (f) of the definition "net loss" ensure that, in certain circumstances, allowable capital losses (net of income or profits tax refunded) from the disposition of excluded property referred to in paragraph (c) or (c.1) of the "excluded property" definition are included in computing a foreign affiliate's "taxable loss" and, ultimately, "taxable surplus" or "taxable deficit".

These amendments apply in respect of dispositions of property that occur after December 18, 2009.

"taxable earnings"

The definition "taxable earnings" is relevant for the purposes of computing the taxable surplus and taxable deficit of a foreign affiliate.

Paragraph (b) of the definition "taxable earnings" is being amended to reflect the addition of paragraphs (e) and (f) to the definition "net earnings". Paragraph (b) is also being restructured to simplify its language. As part of this restructuring, subparagraph (b)(v) is being repealed.

This amendment applies in respect of dispositions of property that occur after December 18, 2009.

"taxable loss"

The definition "taxable loss" is relevant for the purposes of computing the taxable surplus and taxable deficit of a foreign affiliate.

Similar to the changes to the definition "taxable earnings" noted above, paragraph (b) of the definition "taxable loss" is being amended to reflect the addition of paragraphs (e) and (f) to the definition "net loss". Paragraph (b) is also being restructured to simplify its language.

Paragraph (b) is also being amended as a result of the Budget 2007 Act changes to take into account certain losses that are recharacterized under paragraph 95(2)(a) of the Act. This is achieved by the reference in amended subparagraph (b)(iii) to paragraph (b) of the "loss" definition in subsection 5907(1).

These amendments apply to taxation years of a foreign affiliate that end after 1999, except that no reference is made to paragraphs (e) and (f) of the "net loss" definition for dispositions that occur before December 18, 2009.

"taxable surplus"

The definition "taxable surplus" is primarily relevant for the purposes of determining the deductibility of dividends received from a foreign affiliate, pursuant to subsections 5900(1) of the Regulations and subsection 113(1) of the Act.

Various amendments are being made to the definition "taxable surplus". Some of these amendments restructure certain aspects of the definition in order to allow more flexibility in picking up appropriate references to the provisions of sections 5902 and 5905 as they may be amended from time to time. A new subparagraph (iv.1) has also been added under variable A in order to allow for adjustments under the elective transitional rules (as contemplated by clause 51 of these amendments) in subsections 5905(2), (4), (6) and (8) relating to the consolidated net surplus regime.

For detail about the amendments being made to sections 5902 and 5905, refer to the commentary for those sections.

These amendments generally apply after November 1999, except that new subparagraph (iv.1) of variable A generally applies to acquisitions and dispositions of foreign affiliate shares that occur after December 20, 2002.

"underlying foreign tax"

The definition "underlying foreign tax" is primarily relevant for the purposes of determining the deductibility of dividends received from a foreign affiliate, pursuant to subsections 5900(1) of the Regulations and subsection 113(1) of the Act.

Various amendments are being made to the definition "underlying foreign tax". These amendments restructure certain aspects of the definition in order to allow more flexibility in picking up appropriate references to the provisions of sections 5902 and 5905 as they may be amended from time to time.

For detail about the amendments being made to sections 5902 and 5905, refer to the commentary for those sections.

These amendments apply after November 1999.

"underlying foreign tax applicable"

The definition "underlying foreign tax applicable" is relevant for determining the amount deductible by a corporation resident in Canada under paragraph 113(1)(b) of the Act (by virtue of paragraph 5900(1)(d) of the Regulations) in respect of a dividend paid out of the taxable surplus of a foreign affiliate of the corporation. One of the primary features of this definition is a provision that allows taxpayers to disproportionately allocate underlying foreign tax to taxable surplus dividends in order to increase the amount otherwise deductible in respect of a taxable surplus dividend.

This definition is being amended consequential to the introduction of the "tax-free surplus balance" concept in subsection 5905(5.5) of the Regulations. Because the "tax-free surplus balance" concept is premised on the equivalence of grossed-up underlying foreign tax and exempt surplus, it is no longer appropriate to impose any restrictions on the ability to disproportionately allocate underlying foreign tax to a particular dividend from taxable surplus. As such, the restrictions imposed by current subparagraphs (b)(i) to (iii) of the "underlying foreign tax applicable" definition are being repealed.

This amendment applies to whole dividends paid by a foreign affiliate after December 18, 2009.

"whole dividend"

The definition "whole dividend" is relevant for the purposes of determining the portion of a dividend paid out of the various surplus accounts of a foreign affiliate under subsection 5900(1) of the Regulations.

Consequential to the amendments being made to section 5902, paragraph (b) of the definition "whole dividend" is being amended to replace the reference in that paragraph to paragraph 5902(1)(c) with a reference to subparagraph 5902(1)(a)(ii).

This amendment applies to elections made in respect of dispositions that occur after December 18, 2009.

"exempt earnings" French version ("gains exonérés")

The following portions of the French version of the definition "exempt earnings" ("gains exonérés") are amended in order to make language corrections:

  • the portion of the definition "exempt earnings" before paragraph (a), and
  • the portion of paragraph (a) after subparagraph (iii).

These amendments apply to taxation years of a foreign affiliate of a taxpayer that begin after December 20, 2002.

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5907(1.02) (repealed version)

Subsection 5907(1.02) of the Regulations is an interpretive provision for the purposes of the definition "exempt earnings" in subsection 5907(1). It ensures that the determination of whether a corporation has a "qualifying interest" in respect of a foreign affiliate throughout a taxation year, or is related to another corporation throughout a taxation year, is to be made as it would for the purpose of paragraph 95(2)(a) of the Act.

The Budget 2007 Act changes to paragraph 95(2)(a) and the amendments herein to paragraph (d) of the definition "exempt earnings" in subsection 5907(1) have removed any need for the determinations contained in subsection 5907(1.02). As such, it is being repealed.

The repeal of subsection 5907(1.02) applies to taxation years of a foreign affiliate that begin after 2008.

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5907(1.02) (new version)

New subsection 5907(1.02) of the Regulations applies for the purposes of paragraph (d) of the definition "exempt earnings" and paragraph (c) of the definition "exempt loss" in subsection 5907(1). It allows foreign affiliates that would not otherwise meet the requirement in those paragraphs to be resident in a designated treaty country throughout the year to meet that requirement where they become a foreign affiliate in the year, otherwise than as a result of a non-arm's length transaction, and are resident in a designated treaty country at the end of that year.

New subsection 5907(1.02) applies to taxation years of a foreign affiliate that begin after December 18, 2009.

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5907(1.1)

Subsection 5907(1.1) of the Regulations contains rules for the calculation of the surpluses and deficits of a foreign affiliate where the affiliate is a member of a group (the "consolidated group") of foreign affiliates that files a consolidated or combined return in a foreign country, such as the United States, and one of the affiliates (the "primary affiliate") in the group is responsible, on behalf of the group, for paying, or claiming a refund of, the tax of the primary affiliate and the other members of the group (those other members being referred to as the "secondary affiliates").

Subparagraph 5907(1.1)(b)(ii) applies where a secondary affiliate has a loss and the primary affiliate pays an amount to the secondary affiliate in respect of a reduction or refund of the tax that would, but for the loss, otherwise have been payable by the primary affiliate on behalf of the consolidated group. In general terms, that subparagraph results in a reduction of the primary affiliate's surplus balances, and an increase of the secondary affiliate's surplus balances, by the amount of the payment.

Subparagraph 5907(1.1)(b)(ii) is being amended to extend the treatment afforded to losses of the secondary affiliate to tax credits of the secondary affiliate. In other words, the adjustments under subparagraph 5907(1.1)(b)(ii) will now be required to be made in cases where a secondary affiliate has a tax credit and the primary affiliate pays an amount to the secondary affiliate in respect of a reduction or refund of the tax that would, but for the tax credit, have been payable by the primary affiliate for the year on behalf of the consolidated group.

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

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5907(1.3) and (1.4)

Subsection 91(4) of the Act provides for a deduction in the computation of a taxpayer's income in respect of the foreign accrual tax that is attributable to an amount of FAPI that is included in the computation of the taxpayer's income. Subsection 95(1) of the Act defines "foreign accrual tax" to include amounts prescribed to be foreign accrual tax.

In circumstances where the loss of another corporation in a particular group of foreign affiliates is relevant in the computation of the tax liability of the group to a foreign government, paragraphs 5907(1.3)(a) and (b) of the Regulations provide that an amount will be considered foreign accrual tax if the amount is paid by the particular corporation to the other corporation in the group in respect of the use of a loss of any other corporation in the computation of the group's tax liability to the foreign government. These provisions apply where the loss of the other corporation is an active business loss or a capital loss resulting from the disposition of excluded property as well as where the loss is one that is determined under the current version of paragraph 5903(1)(a). Subsection 5907(1.3) is amended, as a consequence of the introduction of new subsection 5907(1.4), to provide that it is subject to subsection 5907(1.4).

New subsection 5907(1.4) ensures that an amount paid by a particular affiliate to another corporation, as contemplated by subsection 5907(1.3), that is in respect of a loss of another corporation will only be foreign accrual tax to the extent that the amount paid can reasonably be considered to be in respect of a FAPL of a controlled foreign affiliate of a person or partnership that is, at the end of the relevant taxation year, a relevant person or partnership (within the meaning of new subsection 5903(6)) in respect of the taxpayer. This is consistent with the fact that, under section 5903 of the Regulations, active business losses and capital losses resulting from the disposition of excluded property of a foreign affiliate are not included in the computation of a FAPL.

Amended subsection 5907(1.3) and new subsection 5907(1.4) apply to taxation years of a foreign affiliate that begin after November 1999.

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5907(2.7) and (2.8)

In general terms, subsection 5907(2.7) of the Regulations provides that, where amounts are included by subparagraph 95(2)(a)(i) or (ii) of the Act in computing the income or loss from an active business of a particular foreign affiliate and these amounts are in respect of amounts paid or payable (other than an amount paid or payable described in clause 95(2)(a)(ii)(D) of the Act) to the particular affiliate by a payer that is another non-resident corporation or a partnership in the group, the amounts paid or payable to the particular affiliate by the payer are required to be deducted in computing the payer's earnings or loss from an active business (unless they have already been deducted under paragraph 5907(2)(j) of the Regulations) for the earliest taxation year in which the amounts were paid or payable.

Subsection 5907(2.8) of the Regulations is analogous to subsection 5907(2.7) but applies more specifically to interest payments governed by clause 95(2)(a)(ii)(D) of the Act.

Subsections 5907(2.7) and (2.8) are being combined and are being amended, consequential to the Budget 2007 Act changes to paragraph 95(2)(a) of the Act, to replace the references to "non-resident corporation" with references to foreign affiliates. The rules of current subsection 5907(2.8) will now be found in paragraph 5907(2.7)(a) while paragraph (b) will contain the rules of current subsection 5907(2.7).

The amendment to subsection 5907(2.7) and the repeal of subsection 5907(2.8) apply to taxation years of a foreign affiliate that begin after 2008.

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5907(5)

Subsection 5907(5) of the Regulations provides that the rules in subsection 95(2) of the Act are to be used to compute the amounts of capital gains and losses to be included in the surplus accounts of a foreign affiliate. It also provides a conversion rule where such gains and losses are computed in Canadian dollars.

Consequential to the amendments made to paragraph 95(2)(f) of the Act as part of the Budget 2007 Act changes, subsection 5907(5) of the Regulations is amended to ensure it refers to capital gains, capital losses, taxable capital gains, and allowable capital losses.

This amendment applies in respect of taxation years of a foreign affiliate that begin after December 18, 2009.

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5907(6)

Subsection 5907(6) is a rule that applies primarily for the purpose of computing a foreign affiliate's surplus balances. It requires that any amounts referred to in subsections 5907(1) and (2) be maintained on a consistent basis from year to year in the currency of the country in which the foreign affiliate is resident or such other currency, other than Canadian currency, as is reasonable in the circumstances.

The amendments to subsection 5907(6) of the Regulations are consequential to the amendments made to paragraph 95(2)(f) of the Act as part of the Budget 2007 Act changes. In particular, the language of subsection 5907(6) is being made consistent with the language in the definition "calculating currency" in subsection 95(1) of the Act. Among other things, this amendment removes the restriction relating to Canadian currency.

This amendment applies in respect of taxation years of a foreign affiliate that begin after December 18, 2009.

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5907(12)

Subsection 5907(12) prescribes a foreign affiliate's adjusted cost base of a partnership interest, for the purpose of paragraph 95(2)(j) of the Act.

As part of an initiative to consolidate the partnership provisions of Part LIX of the Regulations into section 5908, this subsection is being renumbered as subsection 5908(10).

The repeal of subsection 5907(12) applies after December 18, 2009.

Clause 47

Partnerships

ITR
5908

New section 5908 contains a series of provisions relating to partnerships. There are three main aspects of new section 5908, as follows:

  • it provides rules (primarily in subsections 5908(1) to (5) and subsection 5908(8)) that are consequential to changes made to the Act in 1999, particularly in respect of the addition of subsection 93(1.2) and section 93.1;
  • it contains (in subsections 5908(6) and (7)) the partnership aspects of the new rules found in subsections 5905(5.2) and (5.4); and
  • it contains, in subsection 5908(10), the partnership adjusted cost base rules that are prescribed for the purpose of paragraph 95(2)(j) of the Act. (This rule is currently found in subsection 5907(12).)

ITR
5908(1) to (5)

Subsection 5908(1) of the Regulations is a rule that is similar to subsection 93.1(1) of the Act. It deems a partnership's shares of a foreign affiliate to be owned by the members of the partnership, based on the members' proportionate interests in the partnership.

Subsection 5908(2) of the Regulations is a rule that deems dispositions and acquisitions of shares to occur whenever a member's interest in the shares of a foreign affiliate, as determined under subsection 5908(1), changes. Subsection 5908(3) ensures that this rule works appropriately when a partnership acquires or disposes of its entire holdings of shares of a foreign affiliate or when a corporation resident in Canada or a foreign affiliate acquires or disposes of its entire interest in a partnership that holds shares of a foreign affiliate. The dispositions and acquisitions of shares that are deemed to occur under subsection 5908(2) are primarily relevant for determining surplus adjustments under section 5905.

Subsection 5908(4) deals with an additional requirement in subsection 5905(5). Although subsection 5908(2) is sufficient for the purposes of most of the provisions of section 5905 in that only a determination of the number of shares acquired or disposed of is required, subsection 5905(5) also requires the matching up of the deemed seller and the deemed acquirer. Subsection 5908(4) does this by deeming the shares that are deemed sold to be sold proportionately to the members of a partnership that are deemed to acquire the shares.

Subsection 5908(5) provides a rule to ensure that shares deemed owned under subsection 5908(1) by a predecessor corporation are deemed to become property of an amalgamated corporation for the purpose of subsection 5905(5.1).

These new subsections generally apply for taxation years of foreign affiliates that begin after November 1999 except that a transitional reading of subsections 5908(1) and (2) is provided to reflect an earlier draft of these rules (which were initially proposed to be numbered as subsections 5905(14) and (15)). This transitional reading applies to certain specified events that either occur or begin on or before December 18, 2009.

ITR
5908(6) and (7)

Subsections 5908(6) and (7) provide specific partnership rules to support the surplus adjustment rule in new subsection 5905(5.2) and the bump limitation rule in new subsection 5905(5.4), respectively.

These new subsections apply at the same time as new subsections 5905(5.2) and (5.4).

ITR
5908(8)

Subsection 5908(8) does three things. First, in paragraph (a), it includes a reference to subsection 93(1.2) of the Act in most cases where subsection 93(1) of the Act is referred to in Part LIX of the Regulations. Second, in paragraph (b), it prescribes the manner in which an election under subsection 93(1.2) of the Act is to be made. Third, in paragraph (c), it prescribes the fraction of the amount of a dividend that is deemed paid, for purposes of subparagraph 93(1.2)(a)(ii) of the Act, where subsection 93(1.3) applies.

This new subsection applies in respect of elections made under subsection 93(1.2) of the Act in respect of dispositions that occur after November 1999.

ITR
5908(9)

Subsection 5908(9) applies in the context of multi-tiered partnerships to ensure that any member of a higher-tier partnership is also a member of any lower-tier partnerships.

This new subsection applies for taxation years of a foreign affiliate of a taxpayer that begin after November 1999. However, there is a transitional rule for foreign affiliate taxation years that end on or before Announcement Date.

ITR
5908(10)

Subsection 5908(10) prescribes the adjusted cost base of a partnership interest to a foreign affiliate for the purpose of paragraph 95(2)(j) of the Act. This rule is currently found in subsection 5907(12) of the Regulations and its content remains largely intact. However, new subparagraph 5908(10)(a)(vi) is added as a consequence of the introduction of the fill-the-hole rule in subsections 5905(7.1) to (7.7) of the Regulations and the need to increase the adjusted cost base of a partnership interest in certain circumstances, as determined under paragraph 5908(11)(b) of the Regulations.

This new subsection applies after December 18, 2009.

ITR
5908(11)

Subsection 5908(11) provides rules that govern increases to adjusted cost base in the context of partnerships where the new fill-the-hole rule (in subsections 5905(7.1) to (7.7)) applies. This new subsection is discussed in the commentary for that new rule.

This new subsection applies where a share of the capital stock of a foreign affiliate is acquired by, or otherwise becomes property of, a person after December 18, 2009.

ITR
5908(12)

Subsection 5908(12) determines the amount for purposes of paragraph 5905(7.7)(b) that, in turn, is deemed to be an exempt dividend under subsection 93(3) of the Act. This rule applies where the fill-the-hole rule (in subsections 5905(7.1) to (7.7)) applies to shares of a foreign affiliate that are held by a partnership.

This new subsection applies where a share of the capital stock of a foreign affiliate is acquired by, or otherwise becomes property of, a person after December 18, 2009.

The following examples illustrate the application of certain aspects of section 5908 and their interaction with sections 5902 and 5905.

Example 1

Assumptions

1. Canco, a corporation resident in Canada, owns all 100 shares of FA1, a foreign affiliate of Canco.

2. Canco transfers 40 shares of FA1 to a partnership (P1) in which Canco's membership interest is 99.99% (based on relative fair market values), and Canco makes a subsection 93(1) election of $40 in respect of the disposition.

3. Immediately prior to the transfer, FA1 has an exempt surplus balance of $100 in respect of Canco, and no other surplus balances.

4. No election is made under subsection 97(2) in respect of the transfer.

Analysis

Subsection 5902(1)

Paragraph 5902(1)(b) will apply to reduce FA1's exempt surplus in respect of Canco by $40, to $60.

Subsection 5908(1)

For the purposes of section 5905, including the computation of Canco's surplus entitlement percentage in FA1 immediately after the transfer, subsection 5908(1) will deem Canco to own 40 shares of FA1 immediately after the transfer.

Subsection 5905(1)

Since Canco owns, or is deemed to own, a total of 100 shares of FA1 both before and after the transfer, there is no change in Canco's surplus entitlement percentage in FA1 as a result of an acquisition or disposition of shares. As such, subsection 5905(1) does not apply and FA1's exempt surplus in respect of Canco would be $60 immediately after the transfer of the 40 FA1 shares to P1.

Example 2

Assumptions

1. Canco, a corporation resident in Canada, owns 100% of the shares of Cansub, a taxable Canadian corporation.

2. Canco is a partner in partnership P1, and the fair market value of Canco's membership interest in P1 is 50% of the fair market value of all member interests in P1.

3. P1 owns 50 shares (50%) of FA1.

4. Canco transfers its interest in P1 to Cansub on a rollover basis under subsection 85(1) of the Act.

5. Immediately prior to the transfer by Canco, FA1's exempt surplus in respect of Canco is $100.

 Analysis

Section 5908 

Subsection 5908(1) will, for certain purposes (including the application of subsection 5908(2)), deem Canco to own 25 shares of FA1 prior to the transfer by Canco.

For certain purposes, including the application of subsection 5905(5), paragraph 5908(2)(a) will deem Canco to have disposed of 25 shares of FA1 and paragraph 5908(2)(b) will deem Cansub to have acquired 25 shares of FA1. (These acquisitions and dispositions are made clear by paragraph 5908(3)(b).)

For the purposes of subsection 5905(5), subsection 5908(4) will deem Canco to have disposed of the 25 shares of FA1 to Cansub.

Subsection 5905(5)

Subsection 5905(5) becomes operative when there is, at any time, a disposition by a corporation resident in Canada (Canco) of any shares of a foreign affiliate of Canco to a non-arm's length taxable Canadian corporation (Cansub). Subsection 5905(5) has the effect of "transferring" the relevant surplus balances of the transferred affiliate in respect of the transferor that are applicable to the transferred shares, to the transferee.

As a result of the application of subsections 5908(1) to (4), subsection 5905(5) would apply in respect of the transferred shares, and would deem FA1's opening exempt surplus in respect of Cansub to be $100.

Example 3

Assumptions

1. Canco, a corporation resident in Canada, owns 100 shares (100%) of FA1 and 100 shares (100%) of FA2.

2. FA2 owns a 60% interest in partnership P1.

3. P1 owns a 50% interest in partnership P2.

4. P2 owns 100 shares (100%) of FA3. FA3 has only one class of shares.

5. FA3 owns 80 shares (80%) of FA4. FA4 has only one class of shares.

6. P2 sells 40 shares (40%) of FA3 to FA1 for proceeds of $1,000 (ACB of $400).

7. Immediately before the disposition of the FA3 shares by P2 to FA1:

  • FA2 has no surplus balances;
  • FA3 has exempt surplus of $1,000 (and no other surplus balances); and
  • FA4 has exempt surplus of $500 (and no other surplus balances).

8. The shares of FA3 are excluded property.

Analysis

Subsection 93(1.3) and subparagraph 93(1.2)(a)(ii) will apply with respect to FA2's otherwise determined taxable capital gain of $90 (60% x 50% x $600/2). Subsection 93(1.3) will deem Canco to have made a subsection 93(1.2) election, and subsection 93(1.2) will deem FA2 to have received, immediately before the disposition of the FA3 shares by P2, a dividend equal to twice the amount that is determined under paragraph 5908(8)(c).

Subsections 93(1.2), (1.3) and 93.1(1), and paragraph 5908(8)(c)

Under subsection 93.1(1) immediately prior to the disposition of 40 shares of FA3 by P2,

  • P1 is deemed to own 50 FA3 shares (100 shares x 50%), and
  • FA2 is deemed to own 30 FA3 shares (50 shares x 60%).

Under subsection 93.1(1) immediately after the disposition of the FA3 shares by P2,

  • P1 is deemed to own 30 FA3 shares (60 shares x 50%), and
  • FA2 is deemed to own 18 FA3 shares (30 shares x 60%).

Under subsection 93(1.3) FA2 is deemed to have disposed of 12 shares of FA3, and Canco is deemed to have made an election under subsection 93(1.2) in respect of these disposed shares.

Paragraph 5908(8)(c) deems the subparagraph 93(1.2)(a)(ii) prescribed amount to be the lesser of (i) FA2's otherwise determined taxable capital gain ($90), and (ii) the amount determined by the formula A x B x C/D.

In the example, the subparagraph 5908(8)(c)(ii) amount is $84, since

  • A is 50%, being the fraction referred to in paragraph 38(a);
  • B is $1,400, being FA3's net surplus in respect of Canco under subparagraph    5902(1)(a)(i);
  • C is 12, being the number of shares determined under subsection 93(1.3); and
  • D is 100, being the total number of shares issued by FA3.

Thus, under paragraph 5908(8)(c) the prescribed amount is $84 (meaning that FA2's taxable capital gain is reduced from $90 to $6), and under paragraph 93(1.2)(a) the deemed dividend is twice that amount, i.e. $168.

Section 5902

By virtue of subparagraph 5902(1)(a)(ii) and subsections 5901(1) and 5900(1), the deemed subsection 93(1.2) elected dividend of $168 is prescribed to be paid out of FA3's exempt surplus.

Under paragraph 5902(2)(b), the "specified adjustment factor" in respect of the disposition of the FA3 shares is, in the example, 3.333, being the amount determined by the formula A/B, where

  • A is Canco's surplus entitlement percentage (100%) in respect of FA2 immediately before the dividend time; and
  • B is Canco's surplus entitlement percentage (30%) in respect of FA3 immediately before the dividend time.

Under subparagraph 5902(1)(b)(i), FA3's exempt surplus in respect of Canco is reduced by $560 ($168 x 3.333) at the "dividend time" to $440. There is no change to FA4's exempt surplus in respect of Canco.

Subsection 5905(1) and section 5908

Subsection 5905(1) would apply to reset FA3 and FA4's exempt surplus balances ("opening exempt surplus") in respect of Canco at the time of the acquisition since:

  • FA1 acquires 40 FA3 shares from P2;
  • immediately before the acquisition, Canco's surplus entitlement percentage in FA3 was 30% (100% x 60% x 50% x 100%) and Canco's surplus entitlement percentage in FA4 was 24% (30% x 80%); and
  • immediately after the acquisition, Canco's surplus entitlement percentage in FA3 is 58% (40% through FA1 and 18% through FA2) and its surplus entitlement percentage in FA4 is 46.4% (58% x 80%).

Therefore, under subsection 5905(1), FA3's exempt surplus in respect of Canco is reset, at the time of the acquisition, to $228 ($440 x 30%/58%), and FA4's exempt surplus in respect of Canco is reset at $259 ($500 x 24%/46.4%).

Clause 48

Foreign Oil and Gas Businesses

ITR
5910

New section 5910 of the Regulations deems, for the purposes of Part LIX of the Regulations, certain foreign oil and gas levies incurred by a foreign affiliate to be income or profits taxes paid in respect of the earnings of the affiliate from certain active businesses. These rules are similar to rules enacted in 2001 in respect of foreign tax credits in section 126 of the Act.

ITR
5910(1)

Subsection 5910(1) is the main operative rule in new section 5910. It provides that, where a foreign affiliate carries on a "foreign oil and gas business" in a "taxing country" in a taxation year, the affiliate is deemed to have paid for the year as an income or profits tax the lesser of two amounts. The first amount is a notional tax amount determined based on current Canadian corporate tax rates and the second is the affiliate's "production tax amount" for the business for the year.

More specifically, the notional tax amount is determined by multiplying a percentage representing a tax rate, as specified in subsection 5910(2), by an earnings amount specified in subsection 5910(3). This product is then reduced by the amount of actual income or profits taxes paid for the year.

ITR
5910(2)

Subsection 5910(2) provides that the corporation's tax rate for the purposes of the notional tax amount in subsection 5910(1) is equal to the percentage set out in paragraph 123(1)(a) of the Act (currently 38%) minus the corporation's general rate reduction percentage, as defined in section 123.4 of the Act (currently scheduled to be as high as 13% after 2011).

ITR
5910(3)

Subsection 5910(3) provides that the affiliate's earnings for the purposes of the notional tax amount are its earnings as determined under the definition of "earnings" in subsection 5907(1) of the Regulations. However, where those earnings are required to be determined under subparagraph (a)(iii) of that definition, they are deemed to be the amount that would be determined to be its earnings on the assumption that it had claimed all deductions that it could have claimed under the Act, up to the maximum amount deductible, and made all claims and elections and taken all steps under applicable provisions of the Act, or of enactments implementing amendments to the Act or regulations in respect of the Act, to maximize the amount of any such deduction.

A transitional measure is included in subsection 5910(3) to ensure that undeducted amounts from prior years for capital cost allowance and other similar items are properly taken into account in post-transition years.

ITR
5910(4)

Subsection 5910(4) simply imports the definitions "foreign oil and gas business," "production tax amount" and "taxing country" in subsection 126(7) of the Act into section 5910.

The rules in new section 5910 generally apply to taxation years of a foreign affiliate of a taxpayer that begin after December 31, 2002. However the taxpayer may designate an earlier date as far back as December 31, 1994. Also, transitional readings in respect of subsections 5910(2) and (3) apply for taxation years of foreign affiliates that begin on or before December 18, 2009.

Clause 49

Permanent Establishments

ITR
8201

Section 8201 of the Regulations provides a definition of the term "permanent establishment" for various purposes of the Act. This section is being amended to remove the reference to the definition "excluded income and excluded revenue" in subsection 95(2.5) of the Act since that definition will now be covered by the new definition of "permanent establishment" in subsection 95(1) of the Act and new subsections 5906(2) and (3) of the Regulations.

This amendment applies to taxation years that end after December 18, 2009.

Clause 50

Elections under Bill C-28

Clause 50 of these amendments contains rules requiring the early application of certain portions of the amendments, referred to above, to subsection 5907(1) of the Regulations. These early applications are, for the most part, consequential to the early application of certain provisions of section 95 of the Act that are required by virtue of certain elections under Bill C-28.

Subclause 50(1) deals with elections made under subsection 26(46) of Bill C-28. This election is commonly referred to as the "global election". Subclause 50(2) deals with elections made under paragraph 26(35)(b) of Bill C-28. Both of these elections generally provide for the application of certain specified provisions to taxation years of foreign affiliates that begin after 1994.   

Clause 51

Consolidated Net Surplus Election

Clause 51 of these amendments provides a special election that allows taxpayers to apply, on a transitional basis, certain rules that were proposed in a February 2004 package of draft legislation but that were never enacted. These rules, which are referred to in these notes as the "consolidated net surplus" rules, were proposed to be found in section 92 of the Act and sections 5902, 5905 and a new section 5911 (which is renumbered herein as section 5905.1) of the Regulations. These transitional rules are generally the same as those published in the February 2004 draft, but do contain some modifications to take into account intervening changes to other provisions of the Act and Regulations as well as certain rules that have not yet been introduced. Readers are referred to the explanatory notes accompanying the February 2004 draft for additional details.

These rules, if elected, generally apply to dispositions of foreign affiliate shares that occur after December 20, 2002 and before December 19, 2009 in respect of which an election is made under subsection 93(1) or (1.2) of the Act, but there are some exceptions. Furthermore, these rules are subject to a further election under section 59 of these amendments.

Clause 52

Modified Consolidated Net Surplus Election

Clause 52 of these amendments applies where a taxpayer has elected under clause 51 of these amendments and further elects to have this section apply. It allows taxpayers to forgo the "consolidated net surplus" rules for the period between December 20, 2002 and February 27, 2004 and instead apply a different rule, found in subsection 5902(6.1), that was originally announced in a December 20, 2002 package of draft legislation. Readers are referred to the explanatory notes accompanying the December 20, 2002 draft for additional details.

These rules, if elected, generally apply to dispositions of foreign affiliate shares that occur after December 20, 2002 and on or before February 27, 2004 in respect of which an election is made under subsection 93(1) or (1.2) of the Act.

Clause 53

Assessments

Clause 53 of these amendments provides for the automatic override of the normal statute-barring rules of subsections 152(4) to (5) of the Act for clauses 50 to 52 and any provision of clause 46 to which clause 50 applies, i.e. provisions that are subject to the foreign affiliate elections in section 26 of Bill C-28. For the provisions of clauses 29 to 38 and 40 to 49 (other than a provision of clause 46 that is subject to clause 50), taxpayers have the option of overriding those statute-barring rules, on a provision by provision basis, by filing an election on or before June 30, 2011.

Part 3

Other Amendments in respect of Income Tax

Income Tax Act

Clause 54

Employment Income

ITA
6

Section 6 of the Income Tax Act (the "Act") provides for the inclusion in an employee's income of most employment-related benefits.

ITA
6(1)(a)

Paragraph 6(1)(a) of the Act provides for the inclusion in computing the income of a taxpayer from an office or employment of the value of employment benefits received or enjoyed by the taxpayer in respect of or in the course of employment, subject to a number of specified exceptions in subparagraphs 6(1)(a)(i) to (v).

Subparagraph 6(1)(a)(i) describes benefits that are derived from an employer's contribution to various types of plans for employees. Subparagraph 6(1)(a)(i) is amended, consequential on the introduction of the employee life and health trust (ELHT) rules, to add a reference to an employer's contributions to an ELHT. Generally, therefore, benefits derived from such contributions are not taxable in the hands of employees.

Note that employee coverage under a group term life insurance policy is a taxable benefit because of subsection 6(4) of the Act and benefits received under certain plans of insurance are taxable because of paragraph 6(1)(f).

For more information on the ELHT rules, please refer to the commentary to new section 144.1.

This amendment applies after 2009.

ITA
6(1)(f)

Paragraph 6(1)(f) of the Act provides for the inclusion in computing the income of a taxpayer from an office or employment of amounts received by the taxpayer on a periodic basis from an insurance plan for sickness or accidents, disability or income maintenance. Paragraph 6(1)(f) is amended, consequential on the introduction of the employee life and health trust (ELHT) rules, to add a reference to insurance plans of this type that are provided through an ELHT. This amendment simply clarifies that the use of an ELHT does not change the character of periodic payments already described in paragraph 6(1)(f).

This amendment applies after 2009.

ITA
6(1)(g)

Paragraph 6(1)(g) of the Act requires the inclusion in the computation of a taxpayer's income from an office or employment of amounts received from an employee benefit plan (or from the disposition of an interest in an employee benefit plan), subject to the exceptions listed in subparagraphs (i) to (iii). Paragraph 6(1)(g) is amended to add a new exception, new subparagraph (iv), for payments of "designated employee benefits" as defined in new subsection 144.1(1).

The introduction of this rule will generally prevent payments of designated employee benefits by a "tainted" employee life and health trust that meets the definition "employee benefit plan" from being taxable to employees. Note that employee coverage under a group term life insurance policy is a taxable benefit because of subsection 6(4) of the Act and benefits received under certain plans of insurance are taxable because of paragraph 6(1)(f).

This amendment applies after 2009.

Clause 55

Employee Stock Options

ITA
7

Section 7 of the Act deals with employee stock option agreements under which employees receive rights to acquire securities of their employer (or of a person with whom the employer does not deal at arm's length). Section 7 sets out the rules for determining the amount to be included as an employment benefit in the employee's income in respect of the exercise or disposition of these rights.

Stock Option Agreement

ITA
7(1)

Subsection 7(1) provides that an employee who acquires a security under an employee stock option agreement is considered to have received a benefit from employment equal to the difference between the fair market value of the security and the amount paid by the employee to acquire the security. The timing of the receipt of this benefit is the year in which the security is acquired, unless subsection 7(1.1) or (8) applies. Subsection 7(1) is being amended in several respects as a consequence of the Budget 2010 proposals related to the tax treatment of employee stock options.

Subsection 7(8) provides, under certain conditions, for the deferral of the recognition of an employment benefit received with respect to stock options on securities of a publicly-listed corporation granted under subsection 7(1) until the year of disposition of the securities underlying the stock option agreement. Budget 2010 announced the repeal of this deferral, along with all related provisions. Subsection 7(1) is therefore amended, consequential on the repeal of subsection 7(8) by Budget 2010, to remove the reference to paragraph 7(8) in the preamble.

Similarly, subsections 7(1.3) and (1.5) are amended to remove the reference to subsection 7(8) consequential on the repeal of the deferral provisions. Subsection 7(1.3) is also amended to remove the reference to paragraph 7(14)(c).

Subsection 7(1) is also amended by adding two new paragraphs, (b.1) and (d.1).

New paragraph 7(1)(b.1) clarifies that an employee is deemed to have received an employment benefit when the employee disposes of rights under a stock option agreement to an employer with which the employee does not deal at arm's length (or to a person not dealing at arm's length with such an employer). New paragraph 7(1)(d.1) provides a similar rule where an employee disposes of the rights under a stock option agreement to a person not dealing at arm's length with the employee (e.g. a spouse) and the transferee in turn disposes of the rights to an employer with whom the employee was not dealing at arm's length. In both paragraphs 7(1)(b.1) and (d.1), the amount of the employment benefit deemed to have been received is equal to the excess of the value of the consideration received for the disposition of the rights to the employer over the amount paid by the employee to acquire the rights.

The amendments to the preamble of subsection 7(1) and to subsections (1.3) and (1.5) apply in respect of stock options exercised after 4 p.m. Eastern Standard Time, March 4, 2010.

The amendment to subsection 7(1) to introduce new paragraphs 7(1)(b.1) and (d.1) applies to dispositions of rights occurring after 4 p.m. Eastern Standard Time, March 4, 2010.

Disposition of Securities

ITA
7(1.3)

Subsection 7(1.3) provides, for the purposes of subsections 7(1.1) and (8), a rule for determining the order in which a taxpayer disposes of shares that are identical properties. Subsection 7(1.3) is amended, consequential on the repeal of subsection 7(8), to repeal references to subsection 7(8). Subsection 7(1.3) is also amended to replace the word "where" with the word "if". This change is not intended to have any substantive impact. For more information, please see the commentary on subsection 7(1).

Exchange of Securities

ITA
7(1.5)

Subsection 7(1.5) contains a special rule that applies for the purposes of subsections 7(1.1) and (8). Under subsection 7(1.5), a qualifying exchange of shares acquired under an employee stock option agreement is deemed not to be a disposition for certain purposes, and the new shares are deemed to be a continuation of the old shares. Subsection 7(1.5) is amended, consequential on the repeal of subsection 7(8), to repeal its reference to subsection 7(8). For more information, please see the commentary on subsection 7(1).

Cancellation of Options

ITA
7(1.7)

Subsection 7(1.7) sets out the rules applicable when a taxpayer's rights to acquire securities under an employee stock option agreement cease to be exercisable in accordance with the agreement and the cessation is not otherwise a transfer or disposition of rights. This could occur, for example, in the course of a corporate reorganization such as an amalgamation.

The preamble to subsection 7(1.7) is amended, consequential on the amendments to subsection 7(1), to clarify the scope of application of the provision and the determination of the taxpayer's employment benefits for the purpose of subsection 7(1) when stock option rights cease to be exercisable.

The amendment to subsection 7(1.7) applies in respect of stock options exercised after 4 p.m. Eastern Standard Time, March 4, 2010.

Definitions

ITA
7(7)

Subsection 7(7) defines the expressions "qualifying person" and "security" for the purposes of section 7 and certain other provisions related to employee stock option agreements. Subsection 7(7) is amended to include a reference to new subsections 110(1.1) and (1.2), which relate to the election made by a qualifying person in respect of a deduction by an employee under paragraph 110(1)(d). As such, the expressions defined in subsection 7(7) will also apply for the purpose of subsections 110(1.1) and (1.2). For more information, please see the commentary on subsections 110(1.1) and (1.2).

The amendment to subsection 7(7) applies in respect of stock options exercised after 4 p.m. Eastern Standard Time, March 4, 2010.

Non-CCPC Employee Options Deferral

ITA
7(8)-(15)

Subsections 7(8) to (15) set out the rules allowing for the deferral of taxation under certain conditions on an employment benefit realized when an employee acquires securities underlying employee stock options granted by a public corporation or a mutual fund trust. These deferral measures are being repealed pursuant to proposals announced in Budget 2010.

The repeal of subsections 7(8) to (15) applies in respect of stock options exercised after 4 p.m. Eastern Standard Time, March 4, 2010.

Qualifying Acquisition – Listing Requirement

ITA
7(9.1)

Existing subsection 7(9), which is being repealed consequential on Budget 2010 proposals, sets out the requirements that must be met for the acquisition of a security under an employee stock option agreement to be considered to be a qualifying acquisition for the purposes of subsection 7(8). In particular, subparagraph 7(9)(d)(ii) requires that, if the option being exercised by the employee was acquired by the employee as a result of one or more exchanges of options under subsection 7(1.4), the shares that could be acquired under each of the previous options must also have been a publicly-listed share at the time of the exchange. In other words, the share underlying the stock option must have been a publicly-listed share throughout.

In the course of certain corporate reorganizations, this requirement cannot be satisfied and as a result, the employee cannot benefit from the deferral provision under subsection 7(8). New subsection 7(9.1) is intended to accommodate situations where, in the course of a "butterfly reorganization", the shares underlying the stock options are temporarily unlisted, but the shares underlying the original options and the final options are publicly-listed.

New subsection 7(9.1) applies after 1999 and before 4 p.m. Eastern Standard Time on March 4, 2010. New subsection 7(9.1) is, however, immediately repealed consequential on the Budget 2010 announcement to repeal the deferral of taxation, under certain conditions, on the exercise of stock option rights to acquire securities of a publicly-listed corporation. For more information, please see the commentary on subsections 7(8) to (15).

Clause 56

Prohibited Deductions

ITA
18

Section 18 of the Act lists deductions that are prohibited in computing a taxpayer's income from a business or property.

Deduction – Election on Disposition of Stock Options

ITA
18(1)(m)

Pursuant to new subsection 110(1.1), enacted as part of the Budget 2010 employee stock option proposals, an employer may make an election with respect to the deduction that would otherwise be available in respect of the payment of an amount to an employee for the disposition of rights under an employee stock option agreement. Under the new subsection 110(1.1) election, an employer may choose to forgo this deduction in order that its employee may claim, in respect of a cash or other payment from the employer on a disposition of stock option rights, the paragraph 110(1)(d) deduction (sometimes referred to as the "stock option deduction") which may apply to offset 50% of the amount included in income in respect of stock option benefits. For more information, please see the commentary on new subsection 110(1.1).

New paragraph 18(1)(m) is introduced, consequential on these Budget 2010 proposals, to ensure that no deduction is available to an employer for an amount that the employer has elected not to deduct under new subsection 110(1.1). Paragraph 18(1)(m) also prohibits an employer from receiving a deduction for payments made by a related corporation (such as a parent corporation) on the employer's behalf in respect of the disposition.

New paragraph 18(1)(m) is applicable in respect of transfers or dispositions of rights occurring after 4 p.m. Eastern Standard Time, March 4, 2010.

ITA
18(1)(o.3)

New paragraph 18(1)(o.3) specifies that contributions to an employee life and health trust are not deductible, except to the extent specified in new paragraph 20(1)(s). New paragraph 20(1)(s) in turn permits deductibility of contributions to an employee life and health trust to the extent specified in new subsections 144.1(4) to (7). For more detail, please refer to the commentary on new section 144.1.

These amendments apply after 2009.

ITA
18(9)(a)

Subsection 18(9) defers the deduction of certain prepaid expenses to the taxation year to which they relate.

Subsection 18(9)(a) is amended to add new subparagraph (iv). New subparagraph (iv) specifies that amounts paid as consideration for the provision of a designated employee benefit (as that term is used in new subsection 144.1(1)) are subject to the prepaid expense rule in subsection 18(9).  New subparagraph (iv) provides an exception for payments for annual insurance coverage in respect of designated employee benefits.

This amendment to paragraph 18(9)(a) is subject to existing subparagraph 18(9)(a)(iii) dealing with consideration for group term life insurance, and to new subsections 144.1(4) to (7), which deal with the timing of deductions of employer contributions to an employee life and health trust.

This amendment applies after 2009.

Clause 57

Deductions

ITA
20(1)(s)

Subsection 20(1) permits certain deductions in computing a taxpayer's income for a taxation year from a business or property.

New paragraph 20(1)(s) permits deductibility of contributions to an employee life and health trust to the extent specified in new subsections 144.1(4) to (7).

This amendment applies after 2009.

Clause 58

International Banking Centres - Election

ITA
33.1(6)

Section 33.1 of the Act provides rules relating to the computation of a taxpayer's income or loss from an international banking centre business. Subsection 33.1(6) of the Act provides for an election with respect to the recording of an eligible deposit in the books of account of an international banking centre business, to be made in the taxpayer's return of income for a taxation year or in a prescribed form filed with the Minister within 90 days following the day of mailing of a notice of assessment for the year or of a notification that no tax is payable for the year.

Subsection 33.1(6) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 59

Capital Gains

ITA
40

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

Deemed Capital Gain

ITA
40(3.21)

New subsection 40(3.21) is introduced consequential on the introduction of new section 180.1, as announced in Budget 2010, which deals with the special relief available to taxpayers who previously deferred taxation of stock option benefits under former subsection 7(8). Under this special relief provision a taxpayer may, under certain circumstances elect, in effect, to eliminate their deferred employee stock option benefit income inclusion and replace it with a deemed taxable capital gain equal to one-half of the lesser of the stock option benefit and the capital loss on the optioned securities. This taxable gain can then be offset by an allowable capital loss on the sale of the related securities, to the extent that that loss has not already been applied against other gains. New subsection 40(3.21) provides that this deemed capital gain under subsection 180.1(2) is to be included in computing the taxpayer's income for a taxation year for the purpose of Part I tax.

For more information, please see the commentary on new section 180.1 and subsection 7(8).

New subsection 40(3.21) is applicable as of March 4, 2010.

Clause 60

Other Income Inclusions

ITA
56

Section 56 of the Act outlines certain types of income that are required to be included in the income of a taxpayer even though they may not be from a source.

Amounts to be Included in Income for Year

ITA
56(1)(a)(iv)

Subparagraph 56(1)(a)(iv) of the Act requires unemployment benefits to be included in the income of a taxpayer.

This subparagraph is amended, consequential to the enactment of the Fairness for the Self-Employed Act, to include in the income of a self-employed taxpayer the amount of benefits received under Part VII.1 of the Employment Insurance Act.

This amendment applies to the 2011 and subsequent taxation years.

Employee Life and Health Trust

ITA
56(1)(z.2)

New paragraph 56(1)(z.2) of the Act, through a reference to the income inclusion in new subsection 144.1(11), in effect requires a taxpayer to include in income an amount that is received from a current or former employee life and health trust (ELHT) to the extent that the amount received is not a payment of a "designated employee benefit". "Designated employee benefit" is defined in new subsection 144.1(1). In most cases, taxable amounts under new paragraph 56(1)(z.2) will be amounts received on the wind-up of an ELHT because most payments to individual beneficiaries of employee life and health trusts will be payments of designated employee benefits. The majority of these designated employee benefits are tax-exempt because of existing rules on employment benefits. New paragraph 56(1)(z.2) could also apply if a former ELHT makes a payment to a beneficiary (for example, the employer) who is not a beneficiary permitted under new paragraph 144.1(2)(d). For more detail, please refer to the commentary on new section 144.1.

This amendment applies after 2009.

Clause 61

Deductions in Computing Income

ITA
60

Section 60 of the Act provides for various deductions in computing income.

Rollover to Registered Disability Savings Plan (RDSP)

ITA
60(m)

Section 60 provides various deductions in computing income. Where a taxpayer has received a refund of premiums out of a registered retirement savings plan (RRSP) or certain other specified amounts, new paragraph 60(m) provides a deduction for qualifying payments (not exceeding the amounts so received) made to a registered disability savings plan, if the payment (defined under new subsection 60.02(1) as a "specified RDSP payment") meets the conditions outlined in new section 60.02  For more information, please see the commentary to new section 60.02.

New paragraph 60(m) applies after March 3, 2010. However, the applicable "specified RDSP payments" cannot be made until after June 2011.

Clause 62

Rollover to Registered Disability Savings Plan (RDSP)

ITA
60.02

New section 60.02 provides rules to allow the tax-deferred transfer ("rollover") to a registered disability savings plan (RDSP) of certain amounts received from a registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or registered pension plan (RPP) as a consequence of the death of the annuitant or RPP plan member. In order to qualify for this rollover, the beneficiary of the RDSP must be a child or grandchild of the deceased, and have been financially dependent on the deceased by reason of infirmity. A qualifying beneficiary is referred to in new section 60.02 as an "eligible individual". New section 60.02 also provides transitional rules that provide access to the rollover in situations where the death of the RRSP or RRIF annuitant or RPP member occurred in 2008, 2009 or 2010.

The mechanism for providing the rollover is a deduction, generally similar to the deduction provided by existing paragraph 60(l), which offsets the RRSP, RRIF or RPP income inclusion that occurred as a consequence of the death of the annuitant or member.

New section 60.02 applies after March 3, 2010. However, "specified RDSP payments" (as defined in new subsection 60.02(1)) cannot be made until after June 2011.

Definitions

ITA
60.02(1)

New subsection 60.02(1) of the Act defines a number of terms that apply for the purposes of new section

 60.02.

"eligible individual"

An eligible individual is a child or grandchild of a deceased RRSP or RRIF annuitant or of a deceased RPP member who was financially dependent on the deceased, at the time of the deceased's death, by reason of infirmity of the dependant.

"eligible proceeds"

Eligible proceeds generally means any of a refund of premiums from an RRSP, an eligible amount paid from a RRIF or a lump sum payment (other than from actuarial surplus) from an RPP, that is received by an eligible individual as a consequence of the death, after March 3, 2010, of a parent or grandparent of the eligible individual.

"specified RDSP payment"

A specified RDSP payment is an amount paid after June 2011 to an RDSP under which an eligible individual is the beneficiary, which payment complies with the conditions set out in paragraphs 146.4(4)(f) to (h) and which payment has been designated as a specified RDSP payment by the eligible individual and the RDSP holder (as defined by subsection 146.4(1)) at the time of the payment. This means that amounts deposited to an RDSP for which access to the rollover measure is sought must be identified at the time of deposit. Unlike other RDSP contributions, for which no tax deduction is available, the amount of a "specified RDSP payment" will be included in the recipient's income on withdrawal from the RDSP.

Paragraph 146.4(4)(f) prohibits RDSP contributions if the beneficiary is not a "DTC-eligible individual" (as defined by subsection 146.4(1)) in the applicable taxation year. The application of paragraph 146.4(4)(g) will permit a specified RDSP payment only to the extent that there is room under the $200,000 limit on contributions to RDSPs under which the eligible individual is a beneficiary. Paragraph 146.4(4)(h) requires that RDSP contributions be made only by or with the consent of the RDSP holder.

 "transitional eligible proceeds"

"Transitional eligible proceeds" is relevant to the transitional rules that apply in situations where the death of the RRSP or RRIF annuitant or RPP member occurred after 2007 and before 2011. This new definition, together with the rules in new subsections 60.02(3) to (6), provide transitional rules that recognize that the estate plans of individuals who die during the transitional period may not have been amended to reflect the new rules of general application. "Transitional eligible proceeds" refers to certain amounts received by a taxpayer as a consequence of the death of an RRSP or RRIF annuitant or RPP member, where that death occurred after 2007 and before 2011. In particular, "transitional eligible proceeds" will include an amount received as a consequence of that death that is:

  • any of a refund of premiums from an RRSP, an eligible amount paid from a RRIF or a lump sum payment (other than an amount of actuarial surplus) from an RPP; or
  • any amount that had been rolled-over under paragraph 60(l) to the taxpayer's RRSP or RRIF (that is, the taxpayer previously claimed a 60(l) deduction in respect of the amount) and which is subsequently withdrawn from the RRSP or RRIF for the purposes of making a "specified RDSP payment".

In the latter case, the taxpayer includes the withdrawn amount in income (under existing subsections 146(8) or 146.3(5)), but can claim an offsetting deduction for making the "specified RDSP payment" under new subsection 60.02(4). The payment must be made to an RDSP for an "eligible individual" in relation to the deceased RRSP or RRIF annuitant (from whom the taxpayer received the proceeds that were rolled-over under paragraph 60(l)).

The recipient of transitional eligible proceeds can be an individual taxpayer other than an infirm financially-dependent child or grandchild (in other words, other than an "eligible individual").

An amount that qualifies as "eligible proceeds" (see the definition above) cannot also qualify as "transitional eligible proceeds". Accordingly, if an "eligible individual" receives "eligible proceeds" from the RRSP, RRIF or RPP of a parent or grandparent who dies in the period after March 3, 2010 and before 2011, then those eligible proceeds cannot also be considered to be transitional eligible proceeds.

Deduction for Rollover to RDSP

ITA
60.02(2)

New subsection 60.02(2) permits an eligible individual to claim a deduction in a taxation year for specified RDSP payments made in the taxation year (or within 60 days after the end of the taxation year) not exceeding the amount of eligible proceeds that the eligible individual has included in computing taxable income for the taxation year.

The terms "eligible individual", "eligible proceeds" and "specified RDSP payment" are defined in new subsection 60.02(1).

Conditions – Transitional Rules

ITA
60.02(3)

New subsections 60.02(3) to (6), together with the definition of "transitional eligible proceeds", provide special transitional rules for individuals who die after 2007 and before 2011. These rules recognize that the estate plans for such individuals may not have been amended to reflect the new rules of general application. In particular, the estate plans of such individuals may not have provided for a bequest to the RDSP of an eligible individual, but instead, may have made a bequest directly to the eligible individual, the spouse or common-law partner of the deceased or another beneficiary. The transitional rules are intended to allow such a beneficiary to make a contribution to an RDSP of an eligible individual within the same limitations as apply in the rules of general application.

New subsection 60.02(3) sets out the conditions that must be met for a taxpayer to claim a deduction under the transition rules in new subsections (4) and (5). As described in the commentary on the new definition of "transitional eligible proceeds", the transitional deductibility provisions will apply only in cases of the death of an RRSP or RRIF annuitant or RPP member that occurs after 2007 and before 2011. Further, a deduction is not available under new subsection 60.02(4) or (5) unless transitional eligible proceeds have been included in computing the income of a taxpayer (not necessarily the recipient) and were received by one of the following individuals:

  • an eligible individual;
  • a spouse or common-law partner of the deceased annuitant (or RPP member);
  • a beneficiary of the deceased annuitant's estate; or
  • a person who directly received the proceeds as a consequence of the annuitant's death.

The term "transitional eligible proceeds" is defined under new subsection 60.02(1).

Example 1

Henri died in February 2010. In September 2010, the executor of Henri's estate made a cash payment of $25,000 from Henri's RRSP to Henri's adult son Patrick, who has a disability. At the time of Henri's death, Patrick was "infirm" and dependent on Henri for financial support. Patrick does not transfer the payment to an RRSP and so must include the amount in his taxable income for 2010 as a refund of premiums. In July 2011, Patrick decides to establish an RDSP for himself and he makes a $40,000 deposit to the RDSP. Patrick can designate $25,000 of that amount as a "specified RDSP payment" and he can claim a $25,000 deduction for tax year 2010, the year in which the $25,000 bequest from Henri was included in Patrick's income. The remaining $15,000 out of the $40,000 deposit to the RDSP is a regular non-deductible contribution to the RDSP.

Example 2

Michael and Mary are Jordan's parents. Jordan is an adult who is "infirm" and dependent on his parents for financial support. Before his death in April 2009, Michael had contributed a total of $120,000 to an RDSP under which Jordan is the beneficiary. Michael was the sole contributor to Jordan's RDSP. In December 2009, $150,000 is transferred from Michael's RRSP to Mary's RRSP on a rollover basis. That is, Mary was able to offset the income inclusion from a "refund of premiums" under section 146 of the Act by a deduction that she claimed under paragraph 60(l).

In August 2011, Mary withdraws $50,000 from her RRSP and contributes $50,000 to the Jordan's RDSP. (Based on the prior $120,000 of RDSP contributions from Michael, Mary could contribute up to $80,000 to the RDSP before it reached the $200,000 contribution limit.) Mary must include the $50,000 RRSP withdrawal in her taxable income for 2011, but she may claim an offsetting deduction under new paragraph 60(m) for the contribution to Jordan's RDSP.

Example 3

When Jane died in February 2010, her "infirm" financially-dependent daughter Caitlyn benefited from a tax-free rollover of $70,000 from Jane's RRSP to Caitlyn's RRSP. Jane's daughters Caitlyn and Jessica were the beneficiaries of the death benefit payable from the registered pension plan (RPP) sponsored by Jane's employer. In May 2010, the administrator of the RPP paid a $20,000 death benefit to Jessica, who included that amount in her taxable income for 2009 because of paragraph 56(1)(a). After becoming aware of the 2010 Budget measure for rollovers to RDSP, Jessica decides to make a $20,000 contribution in July 2011 to an RDSP under which her sister Caitlyn is the beneficiary. Under new paragraph 60(m) and new subsection 60.02(4), Jessica can claim a $20,000 deduction for tax year 2010, the year in which she had included the RPP death benefit proceeds in her income. In December 2011, Caitlyn decides to deposit her share of the RPP death benefit ($20,000) to her RDSP. Caitlyn can also claim a $20,000 deduction for tax year 2010 to offset the income inclusion under paragraph 56(1)(a).

Deduction - Transitional Rule

ITA
60.02(4)

New subsection 60.02(4) is relevant in circumstances where transitional eligible proceeds have been included in the taxable income of a taxpayer who is described in new paragraph 60.02(3)(c). This would occur, for example, if an eligible individual or a spouse received a "refund of premiums" (as defined in existing subsection 146(1)) from the deceased's RRSP but did not transfer the amount into their own RRSP, RRIF or annuity, as required for the deduction under paragraph 60(l) to apply.

New subsection 60.02(4) permits the taxpayer to claim a deduction in a taxation year for specified RDSP payments made before 2012, not exceeding the amount of transitional eligible proceeds (as defined in new subsection 60.01(1)) that the taxpayer has included in computing taxable income for the taxation year. The amount of the deduction is subject to approval by the Minister of National Revenue.

This deduction is only available to the extent that the conditions in new subsection 60.02(3) are met. Please refer to the commentary above on new subsection 60.02(3) for information regarding these conditions.

Transitional Rule

ITA
60.02(5)

New subsection 60.02(5) is relevant in circumstances where transitional eligible proceeds (as defined in new subsection 60.01(1)) have been included in computing the income for a taxation year of an RRSP or RRIF annuitant or an RPP member who has died in the year. This would occur, for example, where a portion of an RRSP was left to a financially independent adult child of the deceased (either by will, on intestacy, or through a beneficiary designation). Such a recipient is not eligible to receive a "refund of premiums" under section 146.

In those circumstances, new subsection 60.02(5) provides a deduction in computing the income of the deceased taxpayer to the extent that specified RDSP payments (as defined by new subsection 60.02(1)) are made before 2012 by a beneficiary of the taxpayer's estate or a person who directly received the proceeds as a consequence of the annuitant or member's death. The amount of the deduction is subject to approval by the Minister of National Revenue.

This deduction is only available to the extent that the conditions in new subsection 60.02(3) are met. Please refer to the commentary above on new subsection 60.02(3) for information regarding these conditions.

Limit on Deductions – Transitional

ITA
60.02(6)

New subsection 60.02(6) specifies, for greater certainty, that the total deductions claimed under new subsections (4) and (5) may not exceed the total transitional eligible proceeds in respect of a deceased taxpayer. This rule could be necessary, for example, where two siblings received various amounts from the estate of their parent and wished to make RDSP contributions to their disabled sibling's RDSP.

Clause 63

Exploration and Development Expenses

ITA
66

Section 66 provides rules in respect of Canadian and foreign exploration and development expenses.

Definitions

ITA
66(15)

Subsection 66(15) contains various definitions for the purposes of section 66.

"principal-business corporation"

A "principal-business corporation" is defined in subsection 66(15) as a corporation whose principal business is any of, or a combination of, a number of activities specified in the definition. In addition, a corporation is a principal-business corporation if all or substantially all of its assets are shares in the capital stock of one or more other related corporations the principal businesses of which consist of such activities.

Paragraphs (h) of the definition "principal-business corporation" in subsection 66(15) is amended to ensure that the definition includes a corporation whose principal business is the distribution of energy or the production of fuel using property described in Class 43.1 or 43.2. In addition a reference to "regulations" in paragraph (i) of the definition is changed to a reference to the "Income Tax Regulations."

These amendments to the definition "principal-business corporation" apply to the 2004 and subsequent taxation years which is consistent with the announcement in the 2010 budget.

Clause 64

Amounts Receivable – Rights or Things

ITA
70(2)

Section 70 of the Act provides certain rules that apply on the death of an individual. Subsection 70(2) of the Act provides for an election by the deceased taxpayer's legal representative to file a separate return with respect to "rights or things" receivable at the date of death, to be made by the taxpayer's representative not later than the day that is the later of one year after the date of death of the taxpayer and the day that is 90 days after the mailing of any notice of assessment in respect of the tax of the taxpayer for the year of death.

Subsection 70(2) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 65

Attribution Rules – Trusts – Exceptions

ITA
75(3)(b)

Subsection 75(3) of the Act exempts a number of trusts from the attribution rule in subsection 75(2), under which any income or loss from trust property held by certain reversionary trusts can be attributed for tax purposes to the persons from whom the property was received.

Paragraph 75(3)(b) is amended to exclude employee life and health trusts from the application of subsection 75(2). For more detail, please refer to the commentary on new section 144.1.

This amendment applies after 2009.

Clause 66

Amalgamations – Employee Life and Health Trust Contributions

ITA
87(2)(j.3)

Paragraph 87(2)(j.3) of the Act provides that a corporation formed as the result of an amalgamation is considered to be a continuation of its predecessor corporations for the purposes of a number of provisions in the Act relating to employee benefit plans (EBPs), salary deferral arrangements (SDAs) and retirement compensation arrangements (RCAs). Because of paragraph 88(1)(e.2), this continuity rule generally also applies on the wind up of a subsidiary into its parent under section 88.

Paragraph 87(2)(j.3 ) is amended to add references to paragraph 20(1)(s) and subsections 144.1(4) to (7), which are the new provisions relating to deductibility of employer contributions to employee life and health trusts.

This amendment applies to amalgamations that occur, and windings-up that begin, after 2009.

Clause 67

Denial of Foreign Accrual Tax

ITA
91(4.1) to (4.5)

New subsections 91(4.1) to (4.5) of the Act, together with new rules in section 126 of the Act and section 5907 of the Regulations, are intended to address tax schemes established by taxpayers with the intent of creating foreign tax credits and similar deductions for foreign tax the burden of which is not, in fact, borne by the taxpayer. The main thrust of all of these schemes is to exploit asymmetry as between the tax laws of Canada and those of a relevant foreign jurisdiction in the characterization of equity and debt instruments. These schemes clearly offend the policy underlying the foreign tax credit, foreign accrual tax and underlying foreign tax rules in the Act. Although the Government believes that these schemes can be successfully challenged under existing rules in the Act, including the General Anti-Avoidance Rule in section 245, the magnitude of the potential problem warrants greater assurance through specific and immediate legislative action.

New subsection 91(4.1) denies foreign accrual tax ("FAT") in respect of the foreign accrual property income ("FAPI") of a foreign affiliate of a taxpayer in certain circumstances. These circumstances would generally arise where an investment in either a partnership or a corporation that is characterized as an equity investment for the purposes of the Act is characterized as a debt instrument issued by that entity, or another entity, under the relevant foreign tax law.

More specifically, subparagraph 91(4.1)(a)(i) provides that this FAT denial rule will apply where the taxpayer (or certain other persons connected to the taxpayer, as set-out in the new definition of "pertinent person or partnership" (or "PPOP") in subsection 91(4.5)), is considered to own less than all of the shares of the foreign affiliate, or certain other connected corporations (again, based on the new PPOP concept), under the relevant foreign tax law that are considered to be owned by the taxpayer (or PPOP) under the Act.

Subparagraph 91(4.1)(a)(ii) provides a similar rule for investments in partnerships. The reference to an "indirect" share is intended to address situations in which the taxpayer may, under foreign and Canadian tax law, be considered to have the same level of partnership interest in an upper-tier partnership, but a different level of interest in a partnership of which the upper-tier partnership is a member.

Paragraph 91(4.1)(b) is similar to subparagraph 91(4.1)(a)(ii), but it deals with situations in which the taxpayer itself is a partnership.

New subsection 91(4.2) applies for the purposes of subparagraph 91(4.1)(a)(i). It ensures that subsection 91(4.1) will not be invoked solely because an entity that is treated as a corporation under the Act but that is treated as a fiscally transparent entity under the relevant foreign tax law owns shares of a foreign corporation.

New subsection 91(4.3) applies for the purposes of subparagraph 91(4.1)(a)(ii) and paragraph 91(4.1)(b). It ensures that certain factors will not be taken into account in determining whether subsection 91(4.1) will apply to a particular situation. This exception will apply where one or more of the enumerated factors could otherwise be interpreted as invoking its application and there are no other factors that would trigger the application of the rule. The enumerated factors are, essentially,

  • differences in the computation or, in certain circumstances, the allocation of partnership income as between the relevant foreign tax law and the Act,
  • the treatment of the partnership as a corporation under the relevant foreign tax law, and
  • the treatment of the member as a fiscally transparent entity under the relevant foreign tax law.

Subsections 91(4.2) and (4.3) taken together are intended to ensure, among other things, that so-called "hybrid entities" are not caught by the FAT denial rule where the sole reason for the application of the FAT denial rule would be that the entities are not characterized the same way under foreign and Canadian tax law.

New subsection 91(4.4) ensures that, for purposes of subsections 91(4.1) to (4.3), a taxpayer that is a member of an upper-tier partnership will also be considered to be a member of any partnership of which such upper-tier partnership is a direct or indirect member.

New subsections 91(4.1) to (4.5) generally apply to income or profits tax paid, and amounts prescribed in respect of a foreign affiliate of a taxpayer to be foreign accrual tax applicable, in respect of amounts included in computing the taxpayer's income under subsection 91(1) of the Act for taxation years of the taxpayer that end after March 4, 2010. However, there are transitional rules for taxation years of the taxpayer that end on or before Announcement Date.

Example 1:

Assumptions

1. Canco, a corporation resident in Canada, owns all the shares of FA1, a U.S. resident corporation.

2. FA1 owns all of the common and preferred shares of the capital stock of FA2, also a U.S. resident corporation.

3. FA2's common shares are worth $200 and its preferred shares are worth $100.

4. FA2 owns all the shares of FA3, also a U.S. resident corporation.

5. FA1 sells its preferred shares of FA2 to Canco for $100 cash and, at the same time, enters into an agreement to sell those shares back to FA1 at a fixed price and time in the future.

6. Under U.S. tax principles, Canco is considered to have loaned the $100 of cash to FA1 and is not considered to own the preferred shares of FA2.

Analysis

Since Canco is considered, under the relevant foreign tax law, to own less than all of the shares of FA2 that it is considered to own under Canadian tax law, subsection 91(4.1) can potentially apply. However, it will only have an effect where FA1, FA2 or FA3 has FAPI for which Canco wishes to claim a FAT deduction. 

Example 2

Assumptions

1. Canco, a corporation resident in Canada, owns all the shares of FA1, a U.S. resident limited liability company that is treated as a disregarded entity under U.S. tax law.

2. FA1 owns all the shares of the capital stock of FA2, a U.S. resident corporation.

3. FA2 owns all the shares of FA3, also a U.S. resident corporation.

4. FA3 earns FAPI in respect of which it incurs U.S. tax.

Analysis

Absent subsection 91(4.2), subsection 91(4.1) could apply because under U.S. tax law Canco is not considered to own any shares of FA1, because FA1 is not considered to exist. However, provided there are no hybrid instruments in Canco's U.S. foreign affiliate group, subsection 91(4.2) should apply to prevent the application of the FAT denial rule in subsection 91(4.1).

Clause 68

Foreign Accrual Tax

ITA
95(1)

"foreign accrual tax"

The definition "foreign accrual tax" in subsection 95(1) of the Act is relevant for determining the amount of a deduction that a taxpayer may claim under subsection 91(4) in respect of taxes paid or deemed paid in respect of the foreign accrual property income of a foreign affiliate of a taxpayer.

This definition is being amended to provide that it is subject to the new rules in subsection 91(4.1) that deny FAT in certain circumstances. For more details about the new rules in subsection 91(4.1), see the commentary on that subsection.

This amendment applies to taxation years that end after March 4, 2010.

Clause 69

Deduction in Computing Income of Trust

ITA
104(6)

Subsection 104(6) of the Act generally permits a trust to deduct, in computing its income for a taxation year, any income payable in the year to a beneficiary under the trust. Paragraphs 104(6)(a) to (a.3) apply to various special kinds of trusts. New paragraph 104(6)(a.4) permits an employee life and health trust to deduct amounts that became payable by it in the year as "designated employee benefits". For more information regarding employee life and health trusts, please refer to the commentary on new section 144.1.

This amendment applies after 2009.

Clause 70

Distribution by Employee Trust, Employee Benefit Plan or Similar Trust

ITA
107.1

Section 107.1 of the Act provides rules to deal with a distribution to a taxpayer of property by an employee trust or a trust governed by an employee benefit plan under which the taxpayer is a beneficiary. Section 107.1 is amended to add a reference to an employee life and health trust (ELHT) in the preamble and in paragraph 107.1(a). As a result, in the unusual circumstance that property other than money is distributed by an ELHT, the ELHT will be treated as having disposed of the property at fair market value immediately before the distribution so that any gain may be recognized in the trust. The beneficiary is considered to acquire the property at fair market value.

This amendment applies after 2009.

Clause 71

Qualifying Disposition

ITA
107.4(1)(j)

Under subsection 107.4(3), a qualifying disposition of property to a trust is generally eligible for a tax-deferred rollover. For this purpose, subsection 107.4(1) defines "qualifying disposition" to be a disposition of property to a trust that does not result in any change in the beneficial ownership of the property and that otherwise meets the conditions set out in that subsection. Paragraph 107.4(1)(j), which applies where the transferor is a trust governed by a registered education savings plan (RESP) or certain other special purpose trusts, requires the transferor trust to be the same type of trust as the transferee trust. For example, if the transferor trust is an RESP trust, the transferee trust must also be an RESP trust for the disposition to be a qualifying disposition.

Paragraph 107.4(1)(j) is amended so that it also applies to transfers between employee life and health trusts.

This amendment applies after 2009.

Clause 72

Trusts – Definitions

ITA
108(1)

"trust"

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.

For the purposes of the 21-year deemed disposition rule and other specified measures, subsection 108(1) defines "trust" to exclude certain trusts. Under paragraph (a), trusts governed by RRSPs and a number of other special income plans are among the excluded trusts for these purposes.

Paragraph (a) is amended to add to the list of exclusions an employee life and health trust. For more information regarding employee life and health trusts, please refer to the commentary on new section 144.1.

This amendment applies after 2009.

Clause 73

Deductions

ITA
110

Section 110 provides various deductions that a taxpayer may claim in computing the taxpayer's taxable income for a taxation year.

Employee Stock Options

ITA
110(1)

Paragraph 110(1)(d) provides a 50% deduction in computing taxable income if certain conditions are met when an employee exercises, transfers or disposes of rights under an employee stock option agreement. Under existing paragraph 110(1)(d), when an employee transfers or disposes ("cashes out") rights under a stock option agreement, the employee is entitled to this 50% deduction. This deduction is not denied even if the consideration for the disposition is fully deductible by the employer. In such a case, both the employee and the employer would be generally entitled to a deduction in respect of the same employment benefit.

Paragraph 110(1)(d) is amended to include a requirement that the employee (or a person not dealing at arm's length with the employee in circumstances, such as the death of the employee, described in paragraph 7(1)(c)) exercise the employee's rights under the stock option agreement and acquire the securities underlying the agreement in order for the deduction in computing taxable income to be available. This new requirement is set out as subparagraph 110(1)(d)(i) and, in conjunction with existing paragraph 7(3)(b) (which effectively prevents an employer, on the issuance of securities in relation to an employee stock option agreement, from claiming a deduction in relation to the issuance of securities), ensures that only one deduction is available in respect of an employment benefit. In other words, if employee stock option rights are surrendered to an employer for cash or an in-kind payment, then (subject to new subsections 110(1.1) and (1.2)) the employer may deduct the payment but the employee cannot claim the stock option deduction. Conversely, where an employer issues securities pursuant to an employee's exercise of stock options, the employer can not deduct an amount in respect of the issuance, but the employee may be eligible to claim a deduction under paragraph 110(1)(d).

The requirements of new subparagraph 110(1)(d)(i) are generally waived to the extent that an employer gives up its deduction on the cash or in-kind payment to the employee by making an election under new subsection 110(1.1). For more information, please see the commentary on new subsection 110(1.1).

As a consequence of the addition of new subparagraph 110(1)(d)(i), the existing subparagraph 110(1)(d)(i) has been renumbered as subparagraph (i.1).

New subparagraph 110(1)(d)(i) applies in respect of acquisitions of securities and transfers or dispositions of rights occurring after 4:00 p.m. Eastern Standard Time on March 4, 2010.

Election

ITA
110(1.1)

New subsection 110(1.1) is introduced consequential on the Budget 2010 proposal to require that securities that are the subject of an employee stock option agreement be acquired in order for the employee to be eligible to claim the stock option deduction under paragraph 110(1)(d). As an alternative to the employee being ineligible for the stock option deduction on disposition of rights under a stock option agreement, Budget 2010 announced the creation of an employer election to forgo its deduction for the payment to its employees on a disposition of those rights. 

New subsection 110(1.1) provides that an employee may claim the 50% stock option deduction that might otherwise be available under paragraph 110(1)(d) only if the employer makes an election that neither the employer, nor a person with whom the employer does not deal at arm's length, will deduct any amount in respect of a payment to or for the benefit of the employee in respect of the disposition (a "cash out") of the employee's rights under a stock option agreement. The use of the phrase "in respect of" is intended to ensure that electing employers renounce the deduction of all related amounts, including, for example, a make-whole payment made to a foreign parent corporation. An exception is provided to preserve an employer's deduction of any "designated amounts" described in new subsection 110(1.2). Please see the commentary on that subsection for more information.

Subsection 110(1.1) also sets out the rules for making and supporting an election in this respect made by the employer. In particular, the employer is required to file the election with the Minister of National Revenue and provide the employee with evidence in writing of the election. In addition, the employee is required to file the evidence with the Minister with his or her return of income for the year in which he or she claims a deduction under paragraph 110(1)(d).

Designated Amount

ITA
110(1.2)

New subsection 110(1.2) defines a "designated amount" for the purposes of new subsection 110(1.1). In order for an amount to be a designated amount, and therefore potentially be deductible by an employer with respect to an employee's disposition of rights under a stock option agreement, three conditions must be met. In general terms, these are as follows:

  • the amount must be otherwise deductible, in the absence of subsection (1.1), in computing the employer's income;
  • the amount must be payable to a person that deals at arm's length with the employer and is not an employee of the employer nor of a person that deals not at arm's length with the employer, and
  • the amount must be payable in respect of an arrangement entered into for the purpose of managing the employer's financial risk associated with a potential increase in value of the securities underlying the stock option agreement.

The purpose of new subsection 110(1.2) is to ensure that the tax treatment of financial risk management arrangements entered into by employers in relation to employee stock option plan risk exposure is generally not affected by the employer's election to give up deductions for payments made to employees under new subsection 110(1.1).

New subsections 110(1.1) and (1.2) apply in respect of transfers or dispositions of rights occurring after 4:00 p.m. Eastern Standard Time on March 4, 2010.

Clause 74

Loss Carryovers

ITA
111

Section 111 of the Act contains rules that generally determine the extent to which a taxpayer is permitted to deduct, in computing taxable income, losses of other years.

Acquisition of Control

ITA
111(4)(e)

Paragraph 111(4)(e) provides generally that, if control of a corporation has been acquired, the corporation may elect to treat itself as having disposed of certain capital properties in its tax year that is deemed to have ended immediately before the acquisition of control if a prescribed form is filed with the Minister of National Revenue on or before the date that is 90 days after the day on which a notice of assessment of tax payable for the year, or a notification that no tax is payable for the year, is mailed to the corporation.

Paragraph 111(4)(e) is amended to replace "mailed" with "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

ITA
111(7.3) to (7.5)

Under the amended definition "non-capital loss" in subsection 111(8), employee life and health trusts will be able to create or increase a non-capital loss with payments of "designated employee benefits" (as defined in new subsection 144.1(1)). This mechanism is being introduced in recognition that the income of an ELHT for a year will not always reflect its obligations to provide designated employee benefits for the year. However, the effect of this amendment to the definition "non-capital loss" will also be to enable such a trust to create a loss in relation to a distribution of the capital of the trust. Consequently, a shorter carry-forward period is provided, which it is anticipated will be sufficient to allow employee life and health trusts to avoid paying income tax in most situations where they have not been overfunded.

New subsection 111(7.3) provides that the normal loss carryover rules in paragraph 111(1)(a) do not apply to an ELHT.

New subsection 111(7.4) establishes a three-year carryforward and three-year carryback period for non-capital losses of an ELHT.

New subsection 111(7.5) prevents certain trusts from deducting any amount in respect of their non-capital losses from years in which they were ELHTs. In particular, a trust that was an employee life and health trust but which does not meet the conditions in new subsection 144.1(2) for a taxation year, or

that is, under new subsection 144.1(3), not operated in accordance with the terms required by new subsection 144.1(2) or that is operated primarily for the benefit of key employees) during the taxation year, may not deduct, in the taxation year, any amount in respect of its non-capital losses from years when in was an ELHT (to which new subsection 144.1(3) did not apply). ELHT status, and the application of new subsection 144.1(3), are year-by-year determinations.

These amendments apply after 2009.

ITA
111(8)

Subsection 111(8) of the Act contains definitions that apply for the purpose of loss carryovers.

Variable E in the definition "non-capital loss" is amended to allow an employment life and health trust to include, in calculating its non-capital loss for a year, amounts payable in the year as "designated employee benefits". A non-capital loss of an employee life and health trust or a former employee life and health trust is subject to special rules under new subsections 111 (7.3) to (7.5). For more information, please refer to the commentary on those provisions.

This amendment applies after 2009.

Clause 75

Credit for EI Premiums and CPP Contributions

ITA
118.7

Section 118.7 of the Act provides for calculating an individual's tax credit in respect of Canada Pension Plan contributions, contributions under a provincial pension plan defined in section 3 of that Act and employment insurance premiums.

The French version of section 118.7 is amended to describe this calculation as a formula.

Section 118.7 is amended, consequential to the enactment of the Fairness for the Self-Employed Act, to provide for a tax credit in respect of premiums paid by a self-employed individual under the Employment Insurance Act. This amendment applies to the 2010 and subsequent taxation years.

Clause 76

GST/HST Credit

ITA
122.5

Section 122.5 of the Act provides rules for determining the Goods and Services Tax/Harmonized Sales Tax Credit (GSTC) for individuals. This refundable credit is delivered to an eligible individual in quarterly payments based on adjusted income and family circumstances, including the number of qualified dependants of the individual.

"adjusted income"

ITA
122.5(1)

Subsection 122.5(1) defines a number of terms for the purpose of the GST credit. The definition "adjusted income" is amended, consequential on the introduction of new subsections 40(3.21) and 180.1(2), to exclude amounts in respect of a deemed gain on the disposition of securities on which the recognition of an employment benefit was deferred under subsection 7(8). As such, the deemed gain will not be included in computing income for certain income-tested benefits. For further information, please see the commentary on subsections 7(8) and 40(3.21) and section 180.1.

Similar amendments are made to the definition "adjusted income" in section 122.6 for the purpose of determining the Canada Child Tax Benefit and in subsection 180.2(1) for the purpose of recovering Old Age Security benefits, as well as to the definition "adjusted net income" in subsection 122.7(1) for the purpose of determining the Working Income Tax Benefit.

These amendments apply to the 2000 and subsequent taxation years.

Shared-custody Parent

ITA
122.5(3.01) and (6)

Subsection 122.5(3) of the Act provides for the calculation of the GSTC and subsection 122.5(6) of the Act provides the rules for determining who is entitled to the credit in respect of a qualified dependant. Under the existing rules, only one individual can receive the credit in respect of a qualified dependant each quarter.

To improve the distribution of the GSTC for parents who share custody of a child, new subsection 122.5(3.01) of the Act modifies the calculation of the credit for shared-custody parents, and subsection 122.5(6) is amended to allow two shared-custody parents to claim the credit in the same quarter with respect to the same qualified dependant.

New subsection 122.5(3.01) provides a formula for the computation of the credit if an eligible individual is a "shared-custody parent" at the beginning of a month. The new definition "shared-custody parent" is added to section 122.6 of the Act. If an eligible individual is a shared-custody parent of a qualified dependant, that parent will now be entitled to one-half of the credit with respect to that qualified dependant that the parent would have received if the parent were the only eligible individual of that qualified dependant. The amount determined by subsection 122.5(3.01) replaces the amount that would otherwise be the amount deemed to have been paid by subsection 122.5(3). For more information on the new definition "shared-custody parent", see the commentary under section 122.6.

Variable A in the formula in new subsection 122.5(3.01) represents the amount that the parent would be entitled to receive if the parent were the only eligible individual with respect to all of the qualified dependants of whom the parent is a shared-custody parent. New subparagraph (b)(ii) of the definition "eligible individual" in section 122.6 provides that a shared-custody parent of a qualified dependant can be an eligible individual in respect of the qualified dependant.

Variable B in the formula in new subsection 122.5(3.01) represents the amount that the parent would be entitled to receive if the parent were not an eligible individual with respect to any of the qualified dependants of whom the parent is a shared-custody parent. By determining the amount in variable B without reference to new subparagraph (b)(ii) of the definition "eligible individual" in section 122.6, a shared-custody parent will not meet the definition of eligible individual in section 122.6 in respect of a qualified dependant of whom they are a shared-custody parent and, as a result, will not be an eligible individual in respect of the qualified dependant for the purposes of variable B.

Subsection 122.5(6) of the Act stipulates who is eligible to collect a GSTC in respect of a qualified dependant if more than one person would otherwise be eligible. Paragraph 122.5(6)(a) allows those persons to agree as to which of them will be eligible for the credit. If no such agreement exists, amended paragraph 122.5(6)(b) provides that two parents may be eligible to collect a credit in respect of a qualified dependant if they are both eligible individuals of the qualified dependant. In any other case, paragraph 122.5(6)(c) permits the Minister of National Revenue to designate who is eligible to collect the credit.

For the purposes of amended paragraph 122.5(6)(b), "eligible individual" has the meaning assigned by section 122.6, except that the words "qualified dependant" in that definition have the meaning assigned by subsection 122.5(1). Two parents will be eligible individuals with respect to the qualified dependant in relation to a month only if both of the individuals are shared-custody parents of the qualified dependant. For information on the amended definition "eligible individual" under section 122.6, see the commentary under that section.  

These amendments apply for amounts credited after June 2011.

Clause 77

Canada Child Tax Benefit – Definitions

ITA
122.6

Section 122.6 of the Act defines a number of terms for the purposes of the Canada Child Tax Benefit.

"eligible individual"

Paragraph (b) of the definition "eligible individual" in section 122.6 of the Act requires that in order to be an eligible individual, an individual must be the parent of a qualified dependant who primarily fulfils the responsibility for the care and upbringing of the qualified dependant.

This definition is amended to permit a "shared-custody parent" in respect of the qualified dependant, referred to in new subparagraph (b)(ii) of the definition, to qualify as an eligible individual.

"shared-custody parent"

The new definition "shared-custody parent" in section 122.6 of the Act provides that two parents will be shared-custody parents in respect of a qualified dependant if

  • the qualified dependant does not reside with their female parent or the circumstances described in subsection 6301(1) of the Income Tax Regulations (discussed further below) are present;
  • the parents are neither cohabiting spouses nor common-law partners of each other;
  • the qualified dependant resides with each parent on an equal or near equal basis; and
  • they both primarily fulfil the responsibility for the care and upbringing of the dependant when residing with the dependant.

Subsection 6301(1) of the Income Tax Regulations generally describes situations in which two or more parents of the qualified dependant, both of whom independently reside with the qualified dependant, have applied for the Child Tax Benefit. In these cases, even though the dependant resides with the female parent, the "female presumption rule" in paragraph (f) of the definition "eligible individual" in section 122.6 of the Act will not apply, such that each person could potentially be considered a shared-custody parent. These situations include those in which

  • a qualified dependant resides with each of the persons filing the notices, and those persons live at different locations;
  • the female parent is a qualified dependant of an eligible individual (for example, a grandfather) and each of them files an application for a Child Tax Benefit in respect of another qualified dependant (for example, a grandson) with whom they reside; and
  • there is more than one female parent of the qualified dependant who resides with the qualified dependant, and each female parent files an application for a Child Tax Benefit in respect of the qualified dependant.

These amendments apply for amounts credited after June 2011.

Clause 78

Canada Child Tax Benefit

ITA
122.61

Section 122.61 of the Act provides for the calculation of the Canada Child Tax Benefit (CCTB). This non-taxable benefit is delivered to an eligible individual in monthly payments based on adjusted income and family circumstances, including the number of qualified dependants of the individual.

Please see the commentary on subsection 122.5(1).

Canada Child Tax Benefit – Deemed Overpayment

ITA
122.61(1) and (1.1)

Section 122.61(1) of the Act provides for the calculation of the CCTB. Under the existing rules, only one individual can receive the benefit in respect of a qualified dependant each month.

To improve the distribution of the CCTB for parents who share custody of a child, new subsection 122.61(1.1) of the Act modifies the calculation of the benefit for shared-custody parents such that both may be entitled to the benefit in the same month with respect to the same qualified dependant. This amendment is concurrent with the amendment to the definition "eligible individual" in section 122.6 of the Act to include certain shared-custody parents.

In this regard, new subsection 122.61(1.1) provides a formula for the computation of the CCTB if an eligible individual is a shared-custody parent at the beginning of a month (as determined by the new definition "shared-custody parent" in section 122.6 of the Act). If an eligible individual is a shared-custody parent of a qualified dependant, that parent will be entitled to one-half of the credit with respect to that qualified dependant that the parent would have received if the parent were the only eligible individual of that qualified dependant. The amount determined by subsection 122.61(1.1) replaces the amount that would otherwise be the overpayment deemed to have arisen by subsection 122.61(1). For more information on the new definition "shared-custody parent", see the commentary under section 122.6.

Variable A in the formula in new subsection 122.61(1.1) represents the amount that the parent would be entitled to receive if the parent were the only eligible individual with respect all of the qualified dependants of whom the parent is a shared-custody parent. New subparagraph (b)(ii) of the definition "eligible individual" in section 122.6 provides that a shared-custody parent of a qualified dependant can be an eligible individual in respect of the qualified dependant.

Variable B in the formula in new subsection 122.61(1.1) represents the amount that the parent would be entitled to receive if the parent were not an eligible individual with respect to any of the qualified dependants of whom the parent is a shared-custody parent. By determining the amount in variable B without reference to new subparagraph (b)(ii) of the definition "eligible individual" in section 122.6, a shared-custody parent will not meet the definition of eligible individual in section 122.6 in respect of a qualified dependant of whom they are shared-custody parent and as a result will not be an eligible individual in respect of the qualified dependant for the purposes of variable B.

These amendments apply for amounts credited after June 2011.

Clause 79

Working Income Tax Benefit

ITA
122.7(1)

Please see the commentary on subsection 122.5(1).

Clause 80

Denial of Foreign Tax Credit

ITA
126(4.11) to (4.13)
126(7) "business-income tax"
126(7) "non-business-income tax"

New subsections 126(4.11) to (4.13) of the Act, together with new rules in subsections 91(4.1) to (4.5) of the Act and section 5907 of the Regulations, are intended to address tax schemes established by taxpayers with the intent of creating foreign tax credits and similar deductions for foreign tax the burden of which is not, in fact, borne by the taxpayer. For more details about these schemes, see the commentary on subsections 91(4.1) to (4.5).

New subsection 126(4.11) denies foreign tax credits ("FTCs") in respect of the income of a partnership in certain circumstances. These circumstances would generally arise where an investment in a partnership that is characterized as an equity investment for the purposes of the Act is characterized as a debt instrument issued by the partnership, or another entity, under the relevant foreign tax law.

More specifically, subsection 126(4.11) provides that this FTC denial rule will apply where the taxpayer is considered to have a lesser direct or indirect share of the partnership's income under the relevant foreign tax law than it is considered to have under the Act. Note that the reference to an "indirect" share is intended to address situations where the taxpayer may, under foreign and Canadian tax law, be considered to have the same level of partnership interest in an upper-tier partnership, but a different level of interest in a partnership of which the upper-tier partnership is a member.

New subsection 126(4.12) ensures that certain factors will not be taken into account in determining whether subsection 126(4.11) will apply to a particular situation. This exception will apply where one or more of the enumerated factors could otherwise be interpreted as invoking its application and there are no other factors that would trigger the application of the rule. The enumerated factors are, essentially,

  • differences in the computation or, in certain circumstances, the allocation of partnership income as between the relevant foreign tax law and the Act,
  • the treatment of the partnership as a corporation under the relevant foreign tax law, and
  • the treatment of the member as a fiscally transparent entity under the relevant foreign tax law.

New subsection 126(4.13) ensures that, for purposes of subsections 126(4.11) and (4.12), a taxpayer that is a member of an upper-tier partnership will also be considered to be a member of any partnership of which such upper-tier partnership is a direct or indirect member.

The definitions "business-income tax" and "non-business-income tax" in subsection 126(7) are amended to ensure they are also subject to new subsections 126(4.11) to (4.13).

New subsections 126(4.11) to (4.13) and the amendments to the definitions "business-income tax" and "non-business-income tax" in subsection 126(7) apply to income or profits tax paid for taxation years of a taxpayer that end after March 4, 2010. However, there are transitional rules for taxation years that end on or before Announcement Date.

Example

Assumptions

1. USco, a U.S. resident corporation, incorporates and capitalizes two U.S. resident subsidiary corporations (Sub 1 and Sub 2).

2. Sub 1 and Sub 2 form and capitalize a partnership (the "Partnership") governed by the laws of Nevada. Sub 1 owns a 99% interest in the partnership, while Sub 2 owns a 1% interest.

3. The Partnership lends all of the funds it receives in 2. back to USco.

4. The Partnership elects to be treated as a U.S. corporation for U.S. tax purposes and is not part of the U.S. consolidated group that includes USco, Sub 1 and Sub 2.

5. Canco purchases, with cash, a 39% share of Sub 1's interest in the Partnership. The purchase is subject to an agreement that obligates Sub 1 to repurchase that 39% partnership interest at a fixed price and time in the future.

6. Sub 1 directly or indirectly loans the funds received in 5. back to Canco.

7. Under U.S. tax law, Canco's purchase of the partnership interest for cash is treated as a loan to Sub 1, which is considered to still own a 99% interest in the Partnership.

8. The Partnership pays 35% tax on the interest income it earns from USco.

Analysis

Canco is considered under U.S. tax law not to own any interest in the Partnership. As such, new subsection 126(4.11) would apply to deny any FTC claim in respect of the 35% U.S. tax paid in respect of the Partnership's income. Although the Partnership is treated as a corporation under U.S. tax law, even if it were treated as a partnership under U.S. tax law, subsection 126(4.11) would still apply. As such, new paragraph 126(4.12)(b) will not protect the partnership from the application of the FTC denial rule.

Clause 81

Application of Section 127.5

ITA
127.55(f)

Section 127.55 of the Act limits the application of the alternative minimum tax set out in section 127.5. Paragraph 127.55(f) is amended to add a reference to an employee life and health trust. As a result, employee life and health trusts are not subject to alternative minimum tax.

For more information regarding employee life and health trusts, please refer to the commentary on new section 144.1.

This amendment applies after 2009.

Clause 82

Changes in Residence

ITA
128.1

Section 128.1 sets out the income tax effects of becoming or ceasing to be resident in Canada.

ITA
128.1(4)(b.1) and (c)

Subsection 128.1(4) sets out rules that apply where a taxpayer ceases to be resident in Canada. Paragraph 128.1(4)(b) generally treats a taxpayer as having disposed of the taxpayer's property, for proceeds equal to fair market value, immediately before the taxpayer's loss of Canadian residence status. New paragraph 128.1(4)(b.1) provides special rules that will apply to a trust, that is or was previously an employee life and health trust, if it is ceases to be resident in Canada. The special rules are intended to discourage employee life and health trusts from giving up their Canadian residency.

New subsection 128.1(4)(b.1) deems a trust that is or was an employee life and health trust that ceases to be resident in Canada to have disposed of all of its property before that cessation for fair market value proceeds. The property is deemed to have been held as inventory and to have a cost of nil.

Paragraph 128.1(4)(c) provides that a taxpayer who experiences a deemed disposition under paragraph 128.1(4)(b) is deemed to have reacquired the taxpayer's property at a cost equal to the proceeds of disposition (as specified in paragraph 128.1(4)(b). Paragraph 128.1(4)(c) is amended to also apply to deemed dispositions occurring under new paragraph 128.1(4)(b.1).

These amendments apply after 2009.

ITA
128.1(10)

"excluded right or interest"

Subsection 128.1(10) defines the expression "excluded right or interest" for the purposes of the taxpayer migration rules in section 128.1. This definition is primarily relevant for paragraphs 128.1(1)(b) and (4)(b), which treat individuals as having disposed of (and immediately reacquired) most of their property on immigrating to or emigrating from Canada. Generally, excluded rights or interests are exempted from these deemed disposition rules. Paragraph (a) of the definition refers to rights under, or an interest in, a trust governed by certain deferred income plans.

Paragraph (a) of the definition is amended to add a reference to employee life and health trusts. This will ensure that a beneficiary under an employee life and health trust who immigrates to or emigrates from Canada will not be treated as having disposed of their rights under the trust.

For more information regarding employee life and health trusts, please refer to the commentary on new section 144.1.

This amendment applies after 2009.

Clause 83

Dividend Refund to Private Corporation

ITA
129(1)(a) and (b)

Section 129 of the Act allows a private corporation that pays a taxable dividend to obtain a partial refund of the taxes it has paid on its investment income.

Paragraph 129(1)(a) provides that the amount of a corporation's dividend refund for a taxation year may be refunded by the Minister of National Revenue without application, upon mailing the notice of assessment for the year.

Paragraph 129(1)(b) requires the Minister of National Revenue to make the dividend refund after mailing the notice of assessment if the corporation has made an application for the refund within a certain period.

Paragraphs 129(1)(a) and (b) are amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 84

Capital Gains Refund to Mutual Fund Corporation

ITA
131(2)(b)

Section 131 of the Act provides rules relating to the taxation of mutual fund corporations and their shareholders. Paragraph 131(2)(b) requires the Minister of National Revenue to make a capital gains refund after mailing a notice of assessment if a mutual fund corporation has made an application for the refund within a certain period.

Paragraph 131(2)(b) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 85

Capital Gains Refund to Mutual Fund Trust

ITA
132(1)(b)

Section 132 of the Act provides rules relating to the taxation of mutual fund trusts. Paragraph 132(1)(b) requires the Minister of National Revenue to make a capital gains refund after mailing a notice of assessment if a mutual fund trust has made an application for the refund within a certain period.

Paragraph 132(1)(b) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 86

Allowable Refund to Non-resident-owned Investment Corporation

ITA
133(6)(a) and (b)

Section 133 of the Act provides rules relating to the taxation of non-resident-owned investment corporations. Subsection 133(6) provides for the refund of a corporation's "allowable refund".

Paragraph 133(6)(a) provides that the amount of a corporation's allowable refund for a taxation year may be refunded by the Minister of National Revenue without application, upon mailing the notice of assessment for the year.

Paragraph 133(6)(b) requires the Minister of National Revenue to make the allowable refund after mailing the notice of assessment if the corporation has made an application for the refund within a certain period.

Paragraphs 133(6)(a) and (b) are amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 87

Insurance Corporations

ITA
138(12)

Section 138 of the Act sets out detailed rules relating to the taxation of insurance corporations. Section 138 is amended to modify existing transitional rules for insurers in respect of their life insurance businesses carried on in Canada ("life insurers"). These modifications are as a result of changes to accounting rules in respect of the International Financial Reporting Standards adopted by the Accounting Standards Board and effective for fiscal years beginning on or after January 1, 2011 ("IFRS").

These proposed modifications to the transitional rules in section 138 are generally intended to ensure that any increase or decrease in the reserves of an insurer resulting from the IFRS accounting changes will be taken into account in computing income for tax purposes over a five-year period. In large part, this transitional treatment is provided by means of extending, to circumstances involving the IFRS accounting changes, existing provisions of the Act that were enacted to provide similar, but separate, transitional relief with respect to earlier accounting changes adopted by the Accounting Standards Board, and effective as of October 1, 2006 ("the 2006 accounting changes").

The tax treatment of changes to a life insurer's reserves as a result of the IFRS accounting changes differs in some ways from the income tax treatment of the 2006 accounting changes. In particular, there is a two-year delay in applying to a life insurer, in respect of transition year amounts arising from the IFRS accounting changes, the transition year income inclusion reversal and transition year income deduction reversal provisions (see subsections 138(18) and (19) of the Act respectively). This two-year delay is intended to defer the transition year income reversal and transition year income deduction reversal until implementation of the second phase of accounting rule changes in respect of the International Financial Reporting Standards effective for fiscal years beginning after 2012. As well, for purposes of subsections 138(18) and (19), the computation of the life insurer's reserve transition amount (under the formula contained in the definition "reserve transition amount" in subsection 138(12)) in respect of changes to the life insurer's reserves as a result of the IFRS accounting changes is done without regard to any of the insurer's "deposit accounting insurance policies" (as newly defined in subsection 138(12)).

Existing rules will apply to treat the five-year transitional amounts as a result of the adoption of IFRS appropriately if, during the transitional period, an insurer transfers its assets to another entity. Particularly, the transferee corporation will be treated as a continuation of the transferor for the purposes of the five-year transition amounts. If a life insurer ceases to carry on a life insurance business, the recognition of the five-year transition period is generally accelerated to the time at which the insurer ceases to carry on that business.

For more details on these amendments, please refer to the commentary on the new definitions "deposit accounting insurance policy" and "excluded policy" in subsection 138(12), the amended definition "transition year" in subsection 138(12), and new subsection 138(17.1) of the Act. For more detail on related changes to the Income Tax Regulations (the "Regulations"), readers may refer to the commentary on the amendments to Parts XIV, XXIV and LXXXVI of the Regulations.

Definitions

ITA
138(12)

"deposit accounting insurance policy"

The new definition "deposit accounting insurance policy" in subsection 138(12) describes insurance policies of a life insurer that are not treated as insurance contracts under IFRS. Such insurance policies would generally be accounted for as investment contracts for purposes of computing a life insurer's income for tax purposes.

As a result of related changes to Part XIV of the Regulations, deposit accounting insurance policies will be excluded from the computation of policy reserves of a life insurer.

A life insurer's deposit accounting insurance policies that would be deposit accounting insurance policies in the insurer's base year if IFRS had applied in that year will be ignored in determining the insurer's reserve transition amount for purposes of subsection 138(18) and (19) of the Act, in respect of policy reserve changes arising from the IFRS accounting changes. For more detail, please refer to the commentary on the definitions "excluded policy" and "transition year" in subsection 138(12) of the Act.

"excluded policy"

The new definition "excluded policy" in subsection 138(12) is added as a result of the adoption of IFRS.

An excluded policy for a life insurer's base year is its deposit accounting insurance policies for that year, determined as though IFRS applied for that year. (Under the existing definition "base year" in subsection 138(12) of the Act, the base year of an insurer is the insurer's taxation year that immediately precedes its transition year – for example, assuming that an insurer's IFRS transition year begins on January 1, 2011, the insurer's base year will be its taxation year that ends on December 31, 2010.)

Excluded policies of an insurer are ignored in determining the insurer's reserve transition amount, for purposes of subsections 138(18) and (19) of the Act, in respect of policy reserve changes arising from the IFRS accounting changes.

By way of background, the reserve transition amount of a life insurer in its IFRS transition year is the positive or negative amount determined by the formula A-B contained in the existing definition "reserve transition amount" in subsection 138(12).

Element B of the formula is the maximum amount that the life insurer is permitted to deduct under subparagraph 138(3)(a)(i) as a policy reserve for its base year. The new "excluded policy" definition is relevant to determining element B of this formula in respect of the IFRS accounting changes. Specifically, because of a related amendment contained in new paragraph 138(17.1)(a), element B is to be read as though the policy reserves referred to in that element were computed without reference to the insurer's excluded policies for its base year.

Element A of the formula is the maximum amount that a life insurer would be permitted to deduct under subparagraph 138(3)(a)(i) (and that would be prescribed by section 1404 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, computed on the basis of two assumptions. The first is that the generally accepted accounting principles ("GAAP") that applied to the insurer in valuing its assets and liabilities for its IFRS transition year had applied to the insurer for its base year (i.e., in effect, the policy reserves are to be computed for this purpose as though GAAP included the IFRS accounting changes in the base year). The second is that section 1404 of the Regulations is to be read in respect of the insurer's base year as it reads in respect of its transition year.

For further details, readers may refer to the commentary on the definitions "deposit accounting insurance policy" and "transition year" in subsection 138(12).

"transition year"

The definition "transition year" provides that a life insurer's transition year is its first taxation year that begins after September 2006. The definition is being amended as a result of the adoption of IFRS by the Accounting Standards Board.

The amended definition "transition year" provides for two separate transition years. The first relates to the 2006 accounting changes and preserves the existing rules under the income tax provisions that apply in respect of the 2006 accounting changes. Therefore, a life insurer's transition year in respect of the 2006 accounting changes remains its first taxation year that begins after September 2006.

The second transition year of a life insurer relates to the adoption of IFRS. In respect of the adoption of IFRS, a life insurer's transition year is its first taxation year that begins after 2010 ("IFRS transition year").

As a result of this amendment, a life insurer will be required to compute, in respect of its life insurance business carried on in Canada in its IFRS transition year, its reserve transition amount (as defined in existing subsection 138(12)) in respect of policy reserves arising from the IFRS accounting changes. (This computation is independent of the reserve transition amount computed in respect of the 2006 accounting changes.) In this regard, existing subsection 138(16) requires the inclusion in computing the insurer's income for its IFRS transition year of the positive amount, if any, of the insurer's reserve transition amount for its IFRS transition year. Similarly, subsection 138(17) requires the deduction in computing the insurer's income for its IFRS transition year of the absolute value of the negative amount, if any, of the insurer's reserve transition amount for its IFRS transition year. Except for the adjustment resulting from new subsection 138(17.1) for excluded policies, if an insurer has included an amount under subsection 138(16), or deducted an amount under subsection 138(17), subsections 138(18) and (19) will provide for corresponding deductions or inclusions — recognized over a five-year period beginning with years that end two years after the start of its transition year — in computing the insurer's income.

For further details, readers may refer to the commentary on new subsection 138(17.1).

These amendments apply to taxation years commencing after 2010.

IFRS transition reversals

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138(17.1)

New subsection 138(17.1) provides rules of application for the purposes of computing the income tax effects, under subsections 138(18) and (19), in respect of an insurer's policy reserves as a result of the IFRS accounting changes.

In respect of the adoption of IFRS, subsection 138(16) requires the inclusion in computing the insurer's income for its transition year of the positive amount, if any, of the insurer's reserve transition amount for its transition year. Subsection 138(17) requires the deduction in computing the insurer's income for its transition year of the absolute value of the negative amount, if any, of the insurer's reserve transition amount for its transition year.

In general terms, if a life insurer has included an amount under subsection 138(16), or deducted an amount under subsection 138(17), subsections 138(18) and (19) will provide for corresponding deductions or inclusions — recognized over a five-year period beginning with years that end two years after the start of its transition year — in computing the insurer's income.

In this regard, paragraph 138(17.1)(a) requires that, in computing a life insurer's reserve transition amount for purposes of the five-year transition period in respect of the IFRS accounting changes set out in subsections (18) and (19), the insurer's excluded policies for its base year are to be ignored in computing the amounts for element B of the formula contained in the definition "reserve transition amount" in subsection 138(12). For more detail, please refer to the commentary on the definition "excluded policy" in subsection 138(12).

New paragraphs 138(17.1)(b) and (c) provide for a two-year delay in applying the transition year income inclusion reversal and transition year income deduction reversal provisions in respect of transition year amounts for life insurers arising from the adoption of IFRS.

These amendments apply to taxation years commencing after 2010.

Clause 88

Deferred and Special Income Arrangements

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144.1

Division G of Part I of the Act deals with Deferred and Special Income Arrangements. Division G is amended to introduce a new section, section 144.1, dealing with employee life and health trusts (ELHTs), a new type of taxable inter vivos trust. These amendments apply to trusts established after 2009. The new rules applicable to ELHTs are based to a large extent on Canada Revenue Agency administrative positions regarding Health and Welfare Trusts. At this time, the government does not intend to make any changes to the tax rules applicable to Health and Welfare Trusts.

ITA
144.1(1)

New subsection 144.1(1) provides definitions that apply for the purposes of new section 144.1.

"actuary"

"Actuary" is defined as a Fellow of the Canadian Institute of Actuaries. This definition is relevant for the purposes of new subsection 144.1(5). The same definition is used in section 147.1 of the Act, which deals with registered pension plans.

"class of beneficiaries"

"Class of beneficiaries" is defined as a group of beneficiaries who have identical rights or interests under the trust. This definition is relevant for the purposes of new paragraphs 144.1(2)(e) and (f).

"designated employee benefits"

"Designated employee benefits" are a subset of the benefits listed in subparagraph 6(1)(a)(i) of the Act and may be described generally as health and insurance benefits. Pursuant to subsection 144.1(2), an ELHT is required to have as its only purposes the provision of designated employee benefits for employees. 

"employee"

"Employee" is defined to include both current and former employees. The inclusion of former employees is intended to accommodate the provision of benefits to retirees, as well as to past employees (for example, in the context of business divestitures). The definition also includes individuals for whom an employer has assumed the responsibility of providing designated employee benefits as a result of a business acquisition. This could be relevant, for example, if a retired individual's employer has been acquired by a new corporation and the new corporation has assumed responsibility for the payment of designated employee benefits for retirees of the acquired employer.

"key employee"

"Key employee" means an employee who is either a "specified employee" (as defined in subsection 248(1) of the Act) or a high-income employee. For this purpose, a high-income employee is an employee whose earnings for any two of the five preceding years exceeded five times the year's maximum pensionable earnings (YMPE) for Canada Pension Plan purposes.  YMPE for 2009 was $46,300 and for 2010 is $47,200.

A trust which includes key employees as beneficiaries must ensure that it satisfies the conditions in paragraphs 144.1(2)(e) and (f) in order to retain its status as an employee life and health trust. For more detail, please refer to the commentary on those paragraphs.

These amendments apply after 2009.

ITA
144.1(2)

New subsection 144.1(2) sets out the conditions that must govern the trust throughout a taxation year in order for a trust to qualify as an ELHT. Because these conditions must be met throughout the year, a trust which fails to satisfy one or more of the conditions at any time during the year will lose its employee life and health trust status for that taxation year. The conditions in new subsection 144.1(2) are required to be incorporated in the terms of the trust arrangement. Consequently, it should be possible to verify whether or not a trust is an employee life and health trust by reviewing the trust agreement or indenture.  

Paragraph (a) requires that the trust's purposes be limited to the provision of designated employee benefits. In this regard, it is intended that all activities that are reasonably related to providing designated employee benefits, such as managing investments, administering payments, and similar supporting activities, be considered to be activities that further the trust's purposes of providing designated employee benefits. It is also intended that winding up the trust in the manner contemplated in new paragraph 144.1(2)(b), or transferring or distributing its assets to another employee life and health trust as part of re-organization, would be considered activities that are part of the trust's overall purpose of providing designated employee benefits.

Paragraph (b) requires that the terms of the trust must provide that, on wind up of the trust, the remaining property of the trust may only be distributed as provided in any of subparagraphs (i) to (iii). Accordingly, in general terms, an employee life and health trust may be wound up by distributing its remaining assets to

  • another employee life and health trust;
  • the government of Canada or a province, or
  • to employee or dependent beneficiaries, but excluding key employees or related individuals.

Paragraph (c) requires that the trust be resident in Canada, under ordinary principles of tax residency for trusts.

Paragraph (d) requires that each beneficiary of the trust be an employee of a participating employer, an employee's spouse or common law partner, a member of the employee's household who is connected to the employee by blood relationship, marriage or adoption, another employee life and health trust or Her Majesty in right of Canada or a province.

Paragraph (e) requires that the ELHT contain at least one class of beneficiaries which class represents at least 25% of all of the beneficiaries of the ELHT in respect of the employer. In addition, at least 75% of the members of the class must be non-key employees of the employer.

Paragraph (f) requires that the rights of key employees who are beneficiaries of an ELHT not be more advantageous than those of the class of beneficiaries described in paragraph (e). It is possible to comply with this rule either by including key employees in a broader class that meets the conditions in paragraph (e), or by establishing a separate class for key employees which has the same (or less advantageous) rights as another class that meets the conditions in paragraph (e).

Paragraph (g) generally provides that the trust must not provide any rights to an employer (or to a person not dealing at arm's length with the employer). Certain exceptions are provided. One exception is for the provision of designated employee benefits to a person not dealing at arm's length with the employer. For example, this exception would permit the controlling shareholder of an employer who is also an employee of the employer, or her spouse, to receive designated employee benefits under the trust. Another exception allows for the existence of covenants and warranties in favour of participating employers to enable them to require the maintenance of employee life and health trust status. The third exception accommodates "prescribed payments". For information regarding "prescribed payments", please refer to the commentary on new section 9500 of the Income Tax Regulations.

Paragraph (h) provides that the trust may not make a loan to, or an investment in, a participating employer or a person not dealing at arm's length with a participating employer. This provision is intended to prevent trust capital from reverting, directly or indirectly, to an employer. Consequently, it is intended that an ELHT could hold a promissory note issued by an employer, as evidence of the employer's indebtedness in relation to unpaid employer contributions, but could not loan money to an employer. Similarly, an ELHT could, subject to the fiduciary obligations of the trustees to manage the trust in the interests of the beneficiaries, accept shares of the employer as a contribution in some circumstances. Paragraph (h) would, however, require the trust's terms to prevent it from using its capital or income to make a new investment in an employer.

Paragraph (i) provides that employer representatives must not constitute a majority of trustees or otherwise control the trust.

These amendments apply after 2009.

ITA
144.1(3)

New subsection 144.1(3) stipulates that an employee life and health trust that, in a taxation year, breaches the terms required to govern the trust under new subsection 144.1(2), or is operated primarily for the benefit of key employees (or family members of key employees) may not deduct any amount pursuant to subsection 104(6) for that taxation year.

This amendment applies after 2009.

ITA
144.1(4)

New paragraph 144.1(4)(a) allows an employer to claim a deduction in respect of its contributions to an ELHT to the extent that the amount being claimed relates to one of three amounts. New subparagraph 144.1(4)(a)(i) provides that amounts payable to a licensed insurance corporation for annual insurance coverage in respect of designated employee benefits may support an employer deduction. For example, if an employee life and health trust uses employer contributions to purchase insurance under a private health services plan, the premiums paid to the insurance company for that year by the trust may be taken into account in determining the deductible portion of employer contributions, even if no medical claims arise in the year among the employees. New clause 144.1(4)(a)(ii)(A) preserves the existing treatment for group term life insurance under section 18. New clause 144.1(4)(a)(ii)(B) allows employers to deduct ELHT contributions that enable the ELHT to pay or provide designated employee benefits that are payable in the same year. In other words, employer contributions that relate to liabilities to make employee benefit payments in future years are not deductible in the year the contributions are made.

It is intended that amounts required to be contributed to fund the portion of an ELHT's administrative and ancillary costs for a taxation year that relate to the designated employee benefits that become payable in the year be deductible by the employer for that year.

New paragraph 144.1(4)(b) provides that amounts that are not deductible under paragraph 144.1(4)(a) that are contributed to enable an employee life and health trust to provide or pay benefits described in subparagraph 144.1(4)(a)(i) or (ii) in a subsequent year are deductible in that subsequent year.

This amendment applies after 2009.

ITA
144.1(5)

New subsection 144.1(5) creates a rebuttable presumption. If, before the time of a contribution, the amount of the contribution was specified in a report by an independent actuary (prepared using accepted actuarial principles and practices) to be reasonably required to enable an ELHT to provide designated employee benefits in a particular year, then, in the absence of evidence to the contrary, the amount is presumed to have been contributed for the purpose of enabling the ELHT to provide those benefits. For example, if a properly prepared actuarial report projects that an ELHT will require $1 million per year for the following five years in order to provide the contemplated designated employee benefits to employees, and an employer contributes $6 million in year one, the employer can (in the absence of evidence to the contrary) rely on the actuarial report to support an employer-level deduction of $1 million per year for each of years one to five. The remaining undeducted $1 million may be deductible the following year (year six) if it may reasonably be regarded as having been contributed to enable the trust to provide designated employee benefits in year six, pursuant to new paragraph 144.1(4)(a).

This amendment applies after 2009.

ITA
144.1(6)

New subsection 144.1(6) provides a special rule to accommodate deductibility for periodic employer contributions to multi-employer employee life and health trusts that meet certain conditions. In general terms, these conditions, which are similar to those which apply to specified multi-employer pension plans under Income Tax Regulation 8510(3), are as follows in relation to a particular year:

  • Not more than 95 percent of the employee beneficiaries will work for a single employer;
  • At least 15 employers will contribute, or at least 10 percent of the employee beneficiaries will work for more than one employer;
  • Employer contributions are made pursuant to a collective bargaining agreement; and
  • Employer contributions are made in whole or in part on a per hour worked basis.

This amendment applies after 2009.

ITA
144.1(7)

New subsection 144.1(7) generally provides that the total amount deducted by an employer in all taxation years in respect of contributions made to an ELHT may not exceed the total amount contributed by the employer to the ELHT. This rule is intended to prevent an employer from attempting to claim a deduction in the later years of a pre-funded ELHT in respect of amounts related to inflation, income earned by the trust or to higher than anticipated benefit payments which are facilitated by strong investment performance within the trust.

Example

An employer contributes $50 million to an ELHT. The trust assumes responsibility for health plan benefits payments for all employees who commenced employment before 1990. Actuarial projections indicate that the trust expects to pay out $50 million in benefits within the first 13 years of its operations, although the life of the trust is expected to be at least 35 years. The benefit payments in later years will be possible because the trust will have been earning investment income throughout its life. Even though the trust is still making benefit payments in those later years, no amount is deductible by the employer once its original contribution of $50 million has been claimed over the years.

ITA
144.1(8)

New subsection 144.1(8) deals with the special situation of an employer who issues promissory notes to an ELHT in relation to the employer's obligation to make contributions to the ELHT. Interest payable by the employer on such notes would not normally be deductible under paragraph 20(1)(c) of the Act, because the interest is not payable on "borrowed money".

Moreover, treating the notes as an investment asset of the trust would cause interest payable to be treated as trust income and, depending on the structure of the notes, could cause the trust to be liable for income tax, under the interest accrual rules in section 12 of the Act, before it had received any payments on the notes.

The new rules in subsection 144.1(8) provide relief from these results by deeming the payments on the notes, whether payments of interest or principal, not to be payments of interest or principal but to be contributions to the trust, the tax treatment of which is governed by section 144.1 (and therefore not by paragraph 20(1)(c) or the interest accrual rules in section 12).

Example

Acme Corporation and the union that represents most of its employees decide to restructure Acme's employee health benefit obligations by establishing an ELHT. The parties calculate that the present value of Acme's health benefit obligations is $10 million. Acme agrees to contribution $3 million in year 1, and to provide the trust with a promissory note bearing 6% simple interest in relation to the remaining $7 million obligation. Interest will accrue annually but no amount is payable on the note in respect of principal or interest until after the end of year 3. The note matures in year 5. Acme's payment schedule is approximately as follows:

Year Acme Payment to Trust Acme Deduction
1 $3 million – first trust contribution $750,000
2 0 $750,000
3 0 $750,000
4 $3.26 million (representing 3 years' interest plus a $2 million principal repayment in respect of promissory note) $750,000
5 $5.6 million (retiring the note with the remaining interest and principal outstanding) $750,000

The parties have also projected that the trust's benefit payments, together with ancillary costs associated with the payment of those benefits, will be approximately $750,000 per year for each of these years. Because of the application of new paragraph 144.1(4)(a), Acme's deduction in year 1 is limited to $750,000. New paragraph 144.1(4)(b) will apply to allow Acme a $750,000 deduction in each of years 2 and 3, leaving $750,000 of the original $3 million contribution undeducted after the end of year 3. In year 4, Acme deducts another $750,000, leaving $3.26 million in undeducted trust contributions to be deducted in future years. In year 5, again $750,000 is deductible for Acme, with the remaining contributions, plus the undeducted balance from year 4, deductible in later years.

The trust will receive all of the payments as capital contributions to the trust.

 ITA
144.1(9)

New subsection 144.1(9) is related to the promissory note rule in new subsection 144.1(8). In order to prevent an employer from having to determine, at the later time of a payment on a promissory note (or similar indebtedness) that it has issued to a trust, that the trust retains its status as an employee life and health trust (ELHT), new subsection 144.1(9) creates a deeming rule. The rule provides that a trust that was an ELHT at the time that the note was issued is deemed to retain that status, for the limited purpose of determining whether an amount that is deemed under new paragraph 144.1(8)(b) to be an employer contribution at a later time (i.e. at the time the payment is made to the trust on the note) may be treated as an employer contribution to an ELHT.

This amendment applies after 2009.

ITA
144.1(10)

New subsection 144.1(10) provides a method of looking through the trust in respect of employee contributions, to the extent that the contributions could receive particular tax treatment (for example, eligibility for the medical expense tax credit) if made directly for a particular benefit rather than through the trust. For this purpose, the trust must identify the contributions as contributions in respect of a particular designated employee benefit at the time they are made. It is anticipated that this will be achieved in most cases by the trust notifying the employer and the employer reporting the contributions on the employee's pay stub.

This amendment applies after 2009.

ITA
144.1(11)

New subsection 144.1(11) requires that any amount received from a trust that is or was an ELHT be included in income, unless the amount was received as the payment of a "designated employee benefit" that is not included in income because of section 6. It is anticipated that this income inclusion would most frequently apply in relation to designated employee benefits that are taxable under section 6 (e.g. employer-paid disability insurance periodic benefits) or on the wind-up of an ELHT to a distribution of residual surplus, or to a payment to a non-qualifying beneficiary of a former ELHT, such as an employer.

This amendment applies after 2009.

ITA
144.1(12)

New subsection 144.1(12) allows an ELHT that administers employee benefits on behalf of employees of more than one employer to elect to be treated for income tax purposes as two or more separate trusts provided that it satisfies the conditions in paragraphs (a) and (b). Paragraph (a) requires that the trust designate the property being held on behalf of each group of employees in an election filed by its filing-due date for the first taxation year of what will be the deemed separate trust (i.e. generally the filing due-date for the year in which the trustees of the trust decide to make the election).  Paragraph (b) requires that the trust terms stipulate that contributions to the trust from one employer accrue only to the benefit of that employer's employees.

This amendment applies after 2009.

ITA
144.1(13)

New subsections 144.1(13) provides that non-capital losses of ELHTs are only deductible to the extent provided by new subsections 111(7.3) to (7.5). For more information, see the commentary on those provisions.

This amendment applies after 2009.

Clause 89

Registered Disability Savings Plans – Definitions

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146.4(1)

The definition "contribution" in subsection 146.4(1) of the Act is amended by adding new paragraph (d) to the definition, consequential on the introduction of new section 60.02. New section 60.02 creates a rollover for "specified RDSP payments" which, in general terms, are amounts deposited to an RDSP as a result of the receipt of proceeds from a retirement savings vehicle of a deceased parent or grandparent of the RDSP beneficiary. For more information, please see the commentary to new section 60.02.

New paragraph (d) of the definition "contribution" applies to a specified RDSP payment (as defined in new subsection 60.02(1)). The effect of the new paragraph is to treat a specified RDSP payment as an RDSP contribution for the purposes of paragraphs 146.4(4)(f), (g),(h) and (n). This means that specified RDSP payments will be subject to the overall RDSP lifetime contribution limit of $200,000, and can only be made in respect of "DTC-eligible individuals" (as defined by subsection 146.4(1)) who are under age 60 and resident in Canada at the time of the specified RDSP payment (see paragraphs 146.4(4)(f) and (g)). Specified RDSP payments will, under paragraph 146.4(4)(h), have to be made either by or with the consent of the RDSP holder. Under paragraph 146.4(4)(n), specified RDSP payments will be treated as private contributions and not as amounts received under the Canada Disability Savings Act.

"Specified RDSP payments" will not be considered contributions for any other purposes. This means, in particular, that specified RDSP payments will not attract Canada Disability Savings Grants under the Canada Disability Savings Act and will be included in the beneficiary's income when withdrawn from the RDSP.

This amendment applies after March 3, 2010.

Clause 90

Charities

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149.1

Section 149.1 of the Act provides the rules that must be met for charities to obtain and keep registered charity status.

Definitions

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149.1(1)

"capital gains pool", "enduring property" and "specified gift"

Consequential to the amendment of the definition "disbursement quota" in subsection 149.1(1) of the Act, the definitions "capital gains pool", "enduring property" and "specified gift" in subsection 149.1(1) are repealed.

"disbursement quota"

The "disbursement quota" (DQ) for a taxation year of a charitable foundation or charitable organization is defined in subsection 149.1(1) of the Act for the purpose of determining the amount that the charity is required, under subsection 149.1(2), (3) or (4) of the Act, to spend in a taxation year on charitable activities or gifts to qualified donees. The formula for the amount of this expenditure requirement contains two general components:

  • a requirement to spend a percentage of gifts received for which an official receipt was issued, including both transfers received from other charities and enduring property disposed that was received in earlier years (and generally excluded from the DQ at that time), but excluding up to the amount of the "capital gains pool" of the charity; and
  • a requirement to spend a percentage of a prescribed amount of charity assets that were not used in charitable programs or administration, if the amount of such assets exceeds $25,000.

In general, a gift from one charity to another that is specified by the donor as a "specified gift" is not considered in the calculation of the DQ of the recipient charity. Such amounts are therefore precluded from satisfying the DQ expenditure requirement of the transferor charity.

Assets referred to in the second requirement are, generally, those owned by the charity at any time in the 24 months immediately preceding the taxation year, not including assets received from other charities during the year and "enduring property" disposed of in the year (as these excluded amounts are already considered in the first requirement). The "prescribed amount" is determined under section 3701 of the Income Tax Regulations.

The DQ definition is amended to eliminate the first requirement and to modify the second. Generally, the amended DQ will require that a charity spend annually 3.5 per cent of the prescribed amount of all assets owned by the charity at any time in the 24 months immediately preceding the taxation year that were not used in charitable programs or administration of the charity, but only if that amount exceeds $25,000 for charitable foundations and $100,000 for charitable organizations.

"designated gift"

The new definition "designated gift" in subsection 149.1(1) of the Act provides that a registered charity can designate, in its information return for a taxation year, a gift or a portion of a gift of property made in the year to another registered charity with which it does not deal at arm's length.

This definition is introduced concurrently with the amendment of paragraph 149.1(1.1)(a) of the Act, such that a designated gift will not satisfy the donor's disbursement quota expenditure requirements under subsection 149.1(2), (3) or (4) of the Act.

This definition also applies for the purpose of exempting a designated gift from the application of new paragraph 149.1(4.1)(d) and new subsection 188.1(12) of the Act to a charity that receives a gift from another charity with which it deals not at arm's length. For more information see the commentary on those new provisions.

These amendments apply for taxation years that end on or after March 4, 2010. 

Exclusions

ITA
149.1(1.1)

Subsection 149.1(1.1) of the Act excludes certain amounts from being included in determining if a registered charity has satisfied its disbursement quota for a year. In particular, this subsection provides that a "specified gift" from the charity to a qualified donee is precluded from satisfying the obligation of the donor charity under subsection 149.1(2), (3) or (4) of the Act, to expend an amount at least equal to its disbursement quota for the year.

Paragraph 149.1(1.1)(a) is amended to eliminate the reference to a "specified gift". This amendment is consequential to the amendment of the definition "disbursement quota" and the concurrent repeal of the definition "specified gift" in subsection 149.1(1) of the Act.

In place of the reference to a specified gift is introduced a reference to a "designated gift". Together with the amendment of subsections 149.1(1) and (4.1) of the Act, this reference will mean that a designated gift cannot be used to satisfy the donor charity's disbursement quota. For more information, refer to the commentary for those subsections.

These amendments apply for taxation years that end on or after March 4, 2010. 

Authority of Minister

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149.1(1.2)

Subsection 149.1(1.2) of the Act provides that, for the purposes of determining the "prescribed amount" of property of a charity that was not used in charitable programs or administration under section 3701 of the Income Tax Regulations (which applies in the calculation of a charity's "disbursement quota" under subsection 149.1(1) of the Act), the Minister of National Revenue may authorize a change of the number of periods chosen by a charity for the purposes of that calculation and may accept any method for the determination of the fair market value of a property.

Subsection 149.1(1.2) is amended consequential to the renumbering of the formula in the disbursement quota definition.

This amendment applies for taxation years that end on or after March 4, 2010.

Revocation of Registration of a Registered Charity

ITA
149.1(4.1)

Subsection 149.1(4.1) of the Act allows the Minister of National Revenue to revoke the registration of a charity in certain circumstances. Paragraph 149.1(4.1)(a) permits revocation in the case of an inter-charity gift if it can reasonably be considered that one of the main purposes of making the gift was to unduly delay the expenditure of amounts on charitable activities (as required, for example, under subsection 149.1(2), (3) or (4) of the Act).

Paragraph 149.1(4.1)(a) is amended to expand its application to any transaction, if it may be considered that a purpose of the transaction was to avoid or unduly delay the expenditure of amounts on charitable activities. These transactions may include a gift to another registered charity.

New paragraph 149.1(4.1)(d) may apply where an amount is transferred by way of gift between registered charities who do not deal at arm's length, unless the donor charity has indicated in its annual information return that the gift is a "designated gift", as now defined in subsection 149.1(1) of the Act. Paragraph 149.1(4.1)(d) provides that the Minister may revoke the recipient charity's registration if it does not spend, in the taxation year in which the gift was received or in the subsequent taxation year, the full amount transferred. That amount must be expended, in addition to the recipient charity's disbursement quota for those two years, on its own charitable activities or by way of gifts to qualified donees with which it deals at arm's length.

This amendment applies for taxation years that end on or after March 4, 2010.

Accumulation of Property

ITA
149.1(8) and (9)

Subsections 149.1(8) and (9) of the Act allow a registered charity, with the approval of the Minister of National Revenue, to accumulate property for a particular purpose, such that the amount accumulated will satisfy the charity's disbursement quota as defined under subsection 149.1(1) of the Act. Subsection 149.1(9) of the Act provides that property so accumulated in a prior year, along with income earned from the property, is deemed to be a gift received that is included in determining the charity's disbursement quota for the year after the expiration of a time period previously specified by the Minister, or an earlier time that the charity has decided not to use the property for the particular purpose.

Subsection 149.1(8) is amended and subsection 149.1(9) is repealed to reflect the changes to the "disbursement quota" definition. In particular, subsection 149.1(8) is amended such that accumulated property and its related income are not to be included in the prescribed amount of all assets owned by the charity that were not used in charitable programs or administration, as long as the charity remains in compliance with the terms and conditions of the Minister's approval.

Subsection 149.1(9) is repealed as gifts received by a charity are no longer relevant to the amended definition of disbursement quota.

These amendments apply for taxation years that end on or after March 4, 2010.

Income of a Charity

ITA
149.1(12)(b)(i)

Subparagraph 149.1(12)(b)(i) of the Act excludes "specified gifts" from the calculation of the income of a charity. Subparagraph 149.1(12)(b)(i) is amended to change this reference to a "designated gift".  For more information, refer to the commentary for the new definition "designated gift" in subsection 149.1(1) of the Act.

This amendment applies for taxation years that end on or after March 4, 2010.

Clause 91

Assessment

ITA
152

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

Definition of "normal reassessment period"

ITA
152(3.1)(a) and (b)

Subsection 152(3.1) of the Act defines "normal assessment period" for the purpose of various provisions in section 152.

Paragraph 152(3.1)(a) provides generally that if the taxpayer is a mutual fund trust or a corporation other than a Canadian-controlled private corporation, the normal reassessment time is the period that ends four years after the earlier of the day of the mailing of a notice of an original assessment of the taxpayer for the year and the day of mailing of an original notification that no tax is payable for the year.

Paragraph 152(3.1)(b) provides generally that if paragraph 152(3.1)(a) does not apply to a taxpayer, the normal reassessment time is the period that ends three years after the earlier of the day of the mailing of a notice of an original assessment of the taxpayer for the year and the day of mailing of an original notification that no tax is payable for the year.

Paragraphs 152(3.1)(a) and (b) are amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Assessment and Reassessment Limitation Period

ITA
152(4)(d)(ii)

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 except in certain circumstances.

Paragraph 152(4)(d) provides generally that where a province has made a "provincial reassessment" in respect of a taxation year of a corporation, the Minister of National Revenue may make an assessment, reassessment or additional assessment in respect of the year on or before the day that is one year after the later of (i) the day on which the Minister is advised of the provincial reassessment, and (ii) the day that is 90 days after the day of mailing of a notice of the provincial reassessment.

Subparagraph 152(4)(d)(ii) is amended to replace "mailing" with "sending".

Clause 92

Withholding

ITA
153

Section 153 imposes tax withholding and remittance obligations on payments described in subsection 153(1).

ITA
153(1)(s)

Subsection 153(1) of the Act requires the withholding of tax from certain payments described in paragraphs 153(1)(a) to (t). The person making the payment is required to remit the amount withheld to the Receiver General on behalf of the payee. Paragraph 153(1)(s) is amended to add a reference to amounts described in new paragraph 56(1)(z.2).

New paragraph 56(1)(z.2) effectively requires a taxpayer to include in income an amount that is received from a current or former employee life and health trust to the extent that the amount received is not a payment of a "designated employee benefit". "Designated employee benefit" is defined in new subsection 144.1(1). For more information, see the commentary on those provisions.

This amendment applies after 2009.

Stock Option Benefits

ITA
153(1.01)

New subsection 153(1.01) is introduced consequential on the Budget 2010 proposal to repeal the tax deferral election with respect to the acquisition of public corporation securities under an employee stock option agreement under former subsection 7(8) and to clarify the tax remittance requirement on the amount of an employment benefit associated with the acquisition of the securities. This proposal is intended to ensure that employee income tax obligations are met and, in particular, prevent situations where an employee is unable to meet his or her tax obligations as a result of a decline in the value of securities acquired under a stock option plan.

New subsection 153(1.01) clarifies that, for the purpose of paragraph 153(1)(a), any amount deemed to be received as an employment benefit under any of paragraphs 7(a) to (d.1) (but subject to the limitations in new subsection 153(1.01), described below) is considered remuneration and subject to the same withholding and remittance rules as if it were a bonus for the taxation year. This ensures that tax obligations on the employment benefit are required to be remitted by the employer in respect of the employee's tax liability. The detailed withholding rules applicable to bonuses are found in subsections 103(1) and (2) of the Income Tax Regulations.

New subsection 153(1.01) also clarifies that the withholding obligation will not be applicable to certain amounts. In particular, pursuant to paragraph 153(1.01)(a), a deduction available to the employee under paragraph 110(1)(d) will be taken into account in applying the withholding rules. As such, withholding will not apply in respect of one-half of the employment benefit that is deductible where the employee is entitled to a deduction under paragraph 110(1)(d).

Pursuant to paragraph 153(1.01)(b), withholding will not apply to an amount deemed to have been received as an employment benefit on the disposition of securities of a Canadian-controlled private corporation (CCPC). This reflects the fact that the employment benefit on the disposition of CCPC securities is not recognised until the securities are sold or exchanged, so withholding may not apply appropriately in such situations.

Pursuant to paragraph 153(1.01)(c), withholding will not apply to an amount that is deductible by the employee under paragraph 110(1)(d.01) in respect of securities donated to a charity if, upon acquisition of the securities, the employee instructs the broker or dealer appointed or approved by the employer to sell the securities immediately and to donate all or part of the proceeds of disposition to a qualifying charity. Subsection 110(2.1) sets out the rule for determining the amount that is deductible by the employee in respect of the donation.

New subsection 153(1.01) applies after 2010. It does not, however, apply to employment benefits arising from stock options granted before 2011 to an employee under a stock option agreement which existed before 4:00 p.m. Eastern Standard Time on March 4, 2010 and which included, at that time, a written condition prohibiting the employee from selling the securities acquired under the agreement for a period of time. This transitional relief allows employers time to adjust their employee stock option plan provisions, if necessary, to allow a sufficient quantity of the related securities to be sold at the time of exercise of an employee stock option in order to satisfy the income tax withholding and remittance obligations.

Undue Hardship - Non-cash Stock Option Benefit

ITA
153(1.31)

Subsection 153(1.1) gives the Minister of National Revenue discretion to reduce the amount required by subsection 153(1) to be deducted or withheld on payments where the Minister is satisfied that the amount required under that subsection to be deducted or withheld from a payment made to a taxpayer would cause undue hardship to the taxpayer.

New subsection 153(1.31) limits the Minister's discretion under subsection 153(1.1) in circumstances where an employee is deemed to have received an employment benefit and the benefit arose from the acquisition of securities. In particular, an employee will not be able to claim undue hardship under subsection 153(1.1) solely because the benefit was received as a non-cash benefit (in other words, because the benefit was received in the form of securities).

New subsection 153(1.31) applies after 2010.

Clause 93

Interest on Penalties

ITA
161(11)(b.1)

Subsection 161(11) requires the payment of interest on penalties imposed under the Act. Subsection 161(11) is amended to add in paragraph (b.1) a reference to new subsection 237.3(8). New subsection 237.3(8) provides a penalty if a person fails to comply with the reporting requirements in respect of a "reportable transaction" under new section 237.3.

This amendment applies in respect of avoidance transactions that are entered into after 2010 or that are part of a series of transactions that begins before 2011 and ends after 2010.

ITA
161(11)(c)

Section 161 of the Act provides for the payment of interest on outstanding amounts of tax and penalties payable under Parts I, I.3, VI and VI.1 of the Act, including late or deficient instalment payments. In particular, subsection 161(11) requires the payment of interest on penalties. Paragraph 161(11)(c) provides generally that interest will accrue for penalties (other than penalties payable because of section 161.1 or under subsection 237.1(7.4) of the Act), from the day of mailing of the notice of original assessment of the penalty to the day of the payment.

Paragraph 161(11)(c) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 94

Contents of Application for Offset of Refund Interest and Arrears Interest

ITA
161.1(3)(c)(i) to (v)

Section 161.1 of the Act provides rules for the offset of interest in respect of overpayments and underpayments by a corporation. Subsection 161.1(3) provides requirements for a valid application for an interest offset. Subparagraphs 161.1(3)(c)(i) to (v) provide generally that a corporation's application for an interest offset is deemed not to have been made unless it is made on or before the day that is 90 days after the latest of

(i) the day of mailing of the first notice of assessment giving rise to any portion of the corporation's overpayment amount to which the application relates,

(ii) the day of mailing of the first notice of assessment giving rise to any portion of the corporation's underpayment amount to which the application relates,

(iii) if the corporation has served a notice of objection to an assessment referred to in (i) or (ii) above, the day of mailing of the notification under subsection 165(3) by the Minister in respect of the notice of objection,

(iv) if the corporation has appealed, or applied for leave to appeal, from an assessment referred to in (i) or (ii) above, to a court of competent jurisdiction, the day on which the court dismisses the application, the application or appeal is discontinued or final judgment is pronounced in the appeal, and

(v) the day of mailing of the first notice to the corporation indicating that the Minister of National Revenue has determined any portion of the corporation's overpayment amount to which the application relates, if the overpayment amount has not been determined as a result of a notice of assessment mailed before that day.

Subparagraphs 161.1(3)(c)(i) to (v) are amended to replace "mailing" with "sending" and "mailed" with "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 95

Partnership Liable to Penalty

ITA
163(2.9)

Subsection 163(2.9) allows a penalty imposed under subsection 163(2.4) to be assessed against a partnership and applies the provisions of the Act relating to assessments, interest, refunds, objections and appeals with respect to the penalty as if the partnership were a corporation. Subsection 163(2.9) is amended to apply to a penalty assessed against a partnership under the proposed reportable transactions rules in new subsection 237.3(8).

This amendment applies in respect of avoidance transactions that are entered into after 2010 or that are part of a series of transactions that begins before 2011 and ends after 2010.

Clause 96

Refunds

ITA
164

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

Refunds

ITA
164(1)(a) and (b)

Subsection 164(1) of the Act provides rules governing refunds of overpayments of tax. Subparagraphs 164(1)(a)(i) and (ii) provide circumstances where the Minister of National Revenue may, before mailing the notice of reassessment for the year, refund all or part of an amount claimed in the taxpayer's return as an overpayment for the year.

Subparagraph 164(1)(a)(iii) provides that the Minister of National Revenue may, on or after mailing the notice of assessment for the year, refund any overpayment for the year, to the extent that the overpayment was not refunded pursuant to subparagraph (i) or (ii).

Paragraph 164(1)(b) generally requires the Minister of National Revenue to make the refund referred to in subparagraph 164(1)(a)(iii) after mailing the notice of assessment if an application has been made for the refund within a certain period.

Paragraphs 164(1)(a) and (b) are amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Exception

ITA
164(1.5)

Subsection 164(1.5) of the Act provides generally that the Minister of National Revenue may, notwithstanding certain restrictions in subsection 164(1), refund all or any portion of an overpayment of tax under certain circumstances, on or after mailing a notice of assessment for a taxation year.

Subsection 164(1.5) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Form Deemed to be a Return of Income

ITA
164(2.3)

Subsection 164(2.3) of the Act provides generally that if an individual has, in accordance with the Child Tax Benefit provisions, filed a form in lieu of a return of income, the form is deemed to be a return of the taxpayer's income for that year and a notice of assessment in respect of that return is deemed to have been mailed by the Minister.

Subsection 164(2.3) is amended to replace "mailed" with "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 97

Objections to Assessments

ITA
165

Section 165 of the Act provides rules governing a taxpayer's right to object to an assessment or determination by the Minister of National Revenue of tax, interest, penalties and certain other amounts.

Objections to Assessments

ITA
165(1)(a) and (b)

Subsection 165(1) of the Act allows a taxpayer to object to an assessment within a certain period of time.

Paragraph 165(1)(a) provides generally that if the assessment is of an individual (other than a trust) or testamentary trust, the taxpayer who objects must serve notice on the Minister on or before the later of (i) the day that is one day after the taxpayer's filing-due date for the year, and (ii) the day that is 90 days after the day of mailing of the notice of assessment.

Paragraph 165(1)(b) provides generally that where the assessment is not of an individual (other than a trust) nor a testamentary trust, the taxpayer who objects must serve notice on the Minister on or before the day that is 90 days after the day of mailing of the notice of assessment.

Paragraphs 165(1)(a) and (b) are amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Limitation of Right to Object to Assessments or Determinations

ITA
165(1.1)

Subsection 165(1.1) of the Act restricts the matters to which a taxpayer may object in respect of certain assessments or determinations made by the Minister of National Revenue. This includes, for example, assessments made to give effect to an order of a court to vacate or vary an earlier assessment under the Act. Subsection 165(1.1) permits a taxpayer to file an objection to such an assessment or determination within 90 days after the day of mailing of the notice of assessment or determination, but generally limits the right of objection to issues arising as a result of that specific assessment or determination.

Subsection 165(1.1) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 98

Service of Objections to Assessments

ITA
166.1(6)

Section 166.1 of the Act allows a taxpayer to apply to the Minister of National Revenue for an extension of time to object to an assessment or make a request under subsection 245(6). If the request is granted, subsection 166.1(6) deems the date on which the notice of objection or request is served or made to be the day the decision of the Minister is mailed to the taxpayer.

Subsection 166.1(6) is amended to replace "mailed" with "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 99

Appeal

ITA
169(1)

Subsection 169(1) of the Act provides that a taxpayer may, under certain conditions, appeal an assessment but that no appeal may be instituted after the expiration of 90 days from the day notice has been mailed to the taxpayer under section 165 that the Minister of National Revenue has confirmed the assessment or reassessment.

Subsection 169(1) is amended to replace "mailed" with "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 100

Special Tax and Relief for Deferral of Stock Option Benefit

ITA
180.1

Budget 2010 proposes to provide relief to taxpayers who took advantage of the tax deferral election on stock options introduced in Budget 2000 and who experienced financial difficulties as a result of a decline in the value of the optioned securities. The proposed relief is in the form of a special elective tax treatment for taxpayers who elected under subsection 7(8) to defer tax liability on their stock option benefit until the disposition of the optioned securities. Budget 2010 proposes to contemporaneously repeal the tax deferral election in respect of public corporations securities. For more information, please see the commentary on subsections 7(8) to (15).

New subsection 180.1 establishes the conditions for taxpayer eligibility for the special elective tax treatment and sets out the rules applicable in respect of the election by the taxpayer to benefit from the relief measure. The taxpayer may make the election for the special relief in any year (before 2015) in which he or she is required to include in income a qualifying deferred stock option benefit.

Election and Special tax

ITA
180.1(1)

New subsection 180.1(1) sets out the conditions that a taxpayer must fulfill in order to make an election to obtain relief from the deferred tax liability. The taxpayer must have made an election under former subsection 7(8) to defer tax liability on an employment benefit deemed to have been received in respect of rights exercised on a stock option agreement under paragraph 7(1)(a). As well, the taxpayer must have disposed of the optioned securities in the year of the election and before 2015.

If the taxpayer disposed of the securities before 2010, the taxpayer is required to file the election for relief on or before the filing-due date for 2010. In any other case, the election must be filed on or before the filing-due date for the taxation year of the taxpayer in which the disposition of the securities occurred.

ITA
180.1(2)

New subsection 180.1(2) sets out the mechanism for relieving the taxpayer of the deferred tax liability associated with his or her stock option benefit. The mechanism, in essence, is set out in new paragraphs 180.1(2)(a) to (c) and allows the taxpayer to claim an offsetting deduction equal to the full amount of the stock option benefit. In place of the "regular" stock option benefit, the taxpayer is deemed to have realized a taxable capital gain equal to one-half of the lesser of the "regular" stock option benefit and the capital loss of the taxpayer on the optioned securities, otherwise determined. The taxpayer may apply any unused allowable capital losses arising on the disposition of the optioned securities against this deemed capital gain. Any proceeds received by the taxpayer on the disposition of the optioned securities is payable as a special tax.

Subsection 180.1(2) also provides rules for opening past taxation years with respect to the election for special relief where the statutory normal reassessment period has expired. New paragraph 180.1(2)(d) deems the election to be an application for reassessment under subsection 152(4.2) (commonly referred to as the "fairness" provision) and therefore allows the Canada Revenue Agency to process the taxpayer's election and associated return for the relevant taxation year for up to 10 years.

Finally, new paragraph 180.1(2)(e) provides for a re-determination by the Minister of National Revenue of the taxpayer's net capital loss (as defined in subsection 111(8)) for the taxation year in which the taxpayer makes the election where losses on the optioned securities have been used. 

Example

The following example illustrates the operation of the special elective tax treatment.

Facts

  • In 2000, a taxpayer exercises his right to acquire 1,000 securities of his employer at a price of $10 each. The securities are trading at a fair market value of $110 each, yielding a stock option benefit of $100,000 (1,000 x ($110 - $10)). The taxpayer makes an election under subsection 7(8) to defer the taxation of that benefit until he disposes of the securities.
  • In April 2010, the taxpayer is still holding the optioned securities – which are now worth $5 each. The fair market value of the securities is therefore insufficient to cover the anticipated tax liability of the taxpayer. The taxpayer decides to elect the special tax treatment for deferred stock option benefits. To do so, he first disposes of his securities (at a fair market value of $5 each) for proceeds of $5,000, and realizes a capital loss of $105,000 (1,000 x ($110 - $5)).

Result

  • Under the special tax treatment, the taxpayer claims a deduction to fully offset the stock option benefit of $100,000 that is realized upon disposition of the optioned securities.
  • He is deemed to have realized a taxable capital gain of $50,000, equivalent to one-half the lesser of the stock option benefit and the capital loss on the optioned securities. This deemed taxable capital gain is included in the taxpayer's income for the 2010 year, i.e. the year in which he disposed of the securities.
  • The taxpayer's allowable capital loss on the optioned securities is $52,500 (i.e. one-half the realized capital loss of $105,000). He uses $50,000 of this allowable capital loss to fully offset his deemed taxable capital gain, thus reducing his unused allowable capital loss by $50,000 to $2,500.
  • The taxpayer pays a special tax of $5,000, equivalent to the value of his proceeds from the disposition of the optioned securities.

ITA
180.1(3)

New subsection 180.1(3) ensures that the deemed taxable capital gain determined under paragraph 180.1(2)(b) is not included in the income base upon which employment insurance is calculated for a person for a taxation year.

ITA
180.1(4)

New subsection 180.1(4) provides that the rules regarding the special tax and relief for deferral of stock option benefits under new Part I.1 are subject to certain general rules relating to assessments and administration under the Act.

New section 180.1 is deemed to have into force on March 4, 2010.

Clause 101

Old Age Security Benefit

ITA
180.2

Please see the commentary on subsection 122.5(1).

Clause 102

Election to Treat Excess as Separate Dividend

ITA
184(3)

Section 184 of the Act provides that a private corporation can identify a dividend as a "capital dividend" and that a mutual fund corporation or a mortgage investment corporation can identify a dividend as a "capital gains dividend". Subsection 184(3) allows a corporation that would otherwise be liable for an excessive capital dividend or capital gains dividend to treat the excess as a separate taxable dividend if an election is made not later than 90 days after the mailing of the notice of assessment in respect of the tax that would otherwise be payable.

Subsection 184(3) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 103

Election to Treat Excessive Eligible Dividend Designation as an Ordinary Dividend

ITA
185.1(2)

Section 185.1 of the Act applies a tax to a corporation that has made an "excessive eligible dividend designation" relating to dividends the corporation has paid and its "general rate income pool". Subsection 185.1(2) allows a corporation to elect to treat an excessive dividend designation as an ordinary dividend, if an election is made on or before the day that is 90 days after the day of mailing the notice of assessment in respect of that tax that would otherwise be payable.

Subsection 185.1(2) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 104

Penalties for Charities

ITA
188.1(11) and (12)

Subsection 188.1(11) of the Act allows the Minister of National Revenue to impose a penalty on a charity when it has made a gift to another charity and it may reasonably considered that one of the main purposes of the gift was to unduly delay the expenditure of amounts on charitable activities.  Both charities are jointly and severally, or solidarily, liable for the penalty.

Subsection 188.1(11) is amended to expand its applications to any transaction, if it may be considered that a purpose of the transaction was to avoid or unduly delay the expenditure of amounts on charitable activities. In the case of a gift to another registered charity, it remains that both charities are jointly and severally, or solidarily, liable for the penalty.

New subsection 188.1(12) of the Act applies in situations where an amount is transferred between non-arm's length charities by way of a gift, other than a designated gift (as defined in subsection 149.1(1) of the Act). The recipient charity is liable to a penalty if it fails to spend, in the taxation year in which the gift was received or in the subsequent taxation year, the full amount transferred.  That amount must be expended, in addition to the recipient charity's disbursement quota for those two years, on its own charitable activities or by way of gifts to qualified donees with which it deals at arm's length.

The Minister may impose a penalty equal to 110% of the difference between the fair market value of the gift and the amount so expended by the charity in addition to its disbursement quota.

These amendments apply for taxation years that end on or after March 4, 2010.

Clause 105

Reduction of Revocation Tax Liability

ITA
189(6.2)(a)(i)

Subsection 189(6.2) of the Act generally applies if the Minister of National Revenue assesses a former registered charity a revocation tax in excess of $1,000. Where subsection 189(6.2) applies, paragraph 189(6.2)(a) generally provides for a reduction of the former charity's liability for revocation tax to the extent that its expenditures on charitable activities exceeds its income during the one-year period that begins immediately after a notice of the latest such assessment was mailed.

Subparagraph 189(6.2)(a)(i) is amended to replace "mailed" with "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 106

Election

ITA
191.2(1)(b)(i) and (ii)

Subsection 191.2(1) of the Act describes various periods during which a taxable Canadian corporation may file an election in respect of a class of taxable preferred shares. Subparagraph 191.2(1)(b)(i) generally describes a six-month period commencing on the day of the mailing of any notice of assessment of tax payable by the corporation for the taxation year in which the shares are first issued or first became taxable preferred shares. Subparagraph 191.2(1)(b)(ii) generally describes a six-month period commencing on the day of mailing of a notice that the Minister of National Revenue has confirmed or varied an assessment, referred to in subparagraph (i), in respect of which the corporation has served a notice of objection.

Subparagraphs 191.2(1)(b)(i) and (ii) are amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

ITA Clause 107

Consideration for Agreement Respecting Liability for Tax


191.3(2)(b)

Section 191.3 of the Act allows a corporation to transfer its Part VI.I tax liability for a taxation year to a related corporation in certain circumstances. Paragraph 191.3(2)(b) provides generally that an agreement to transfer the liability, referred to in subsection 191.3(1), between a transferor corporation and a transferee corporation, must be filed on or before the transferor corporation's return of income under Part I of the Act is required to be filed for the taxation year in respect of which the agreement is filed, or within 90 days of

  • the mailing of a notice of assessment of tax payable under Part I or VI.1 of the Act
    • by the transferor corporation, for the year, or
    • by the transferee corporation, for its taxation year ending in the calendar year in which the taxation year of the transferor corporation ends, or
  • the mailing of a notification that no tax is payable under Part I or Part VI.1 for that taxation year.

Paragraph 191.3(2)(b) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 108

Refund of Part XI Tax

ITA
207(2)(a) and (b)

Part XI of the Act imposes a tax in respect of various transactions relating to registered disability savings plans. Subsection 207(2) of the Act provides authority for the Minister of National Revenue to refund a person's allowable refund of Part XI tax for a calendar year, to the extent that it has not been applied against the person's Part XI tax payable for the year. Paragraph 207(2)(a) generally allows the Minister the discretion, on mailing a notice of assessment for the year, to refund the amount without application by the person. Paragraph 207(2)(b) generally requires that the Minister refund the amount after mailing the notice of assessment if an application for it has been made by the person within three years after that mailing.

Paragraphs 207(2)(a) and (b) are amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 109

Refund of Part XI.01 Tax

ITA
207.07(2)(a) and (b)

Section 207.05 imposes a tax on a person in respect of a tax-free savings account (TFSA) if an advantage, as defined in subsection 201.01(1) of the Act, is extended to any person who is, or who does not deal at arm's length with, the holder of the TFSA.

Subsection 207.07(2) of the Act provides authority for the Minister of National Revenue, if a return has been filed under Part XI.01, to refund a person's allowable refund of Part XI.01 tax for a calendar year, to the extent that it has not been applied against the person's tax payable under that Part for the year. Paragraph 207.07(2)(a) generally allows the Minister the discretion, on mailing a notice of assessment for the year, to refund the amount without application by the person. Paragraph 207.07(2)(b) generally requires that the Minister refund the amount after the mailing the notice of assessment if an application for it has been by the person made within three years after that mailing.

Paragraphs 207.07(2)(a) and (b) are amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 110

Refund of Part XI.3 Tax

ITA
207.7(2)(a) and (b)

Part XI.3 of the Act imposes on the custodian of a retirement compensation arrangement a refundable tax of 50% on contributions to the arrangement and earnings in the plan. The tax is refundable on the payment of retirement benefits from the plan to an employee.

Subsection 207.7(2) of the Act authorizes the Minister of National Revenue to refund to the custodian of a retirement compensation arrangement the amount by which the custodian's balance of refundable tax at the end of the preceding year exceeds the balance at the end of the year. Paragraph 207.7(2)(a) generally allows the Minister of National Revenue the discretion, on mailing a notice of assessment for the year, to refund the amount without application by any person. Paragraph 207.7(2)(b) generally requires that the Minister of National Revenue refund the amount after the mailing the notice of assessment if an application for it has been made within three years after the mailing of an original notice of assessment for the year or of a notification that no tax is payable for the year.

Paragraphs 207.7(2)(a) and (b) are amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 111

Tax on Income from Canada of Non-resident Persons

ITA
212(1)(w)

Subsection 212(1) imposes an income tax at the rate of 25% on certain payments to non-residents. In many cases, the 25% rate is reduced by tax treaty. New paragraph 212(1)(w) provides that payments out of an employee life and health trust made to non-residents are subject to tax under subsection 212(1), except to the extent that they are payments of designated employee benefits.

This amendment applies after 2009.

Clause 112

Limitation Period

ITA
222(4)(a)(i)

Subsection 222(4) of the Act provides a limitation period for the collection of a tax debt of a taxpayer. Subparagraph 222(4)(a)(i) provides that the limitation period for the collection of a tax debt of a taxpayer begins, if the notice of assessment, or a notice referred to in subsection 226(1), in respect of the tax debt is mailed to or served on the taxpayer, after March 3, 2004, on the day that is 90 days after the day on which the last one of those notices is mailed or served.

Subparagraph 222(4)(a)(i) is amended to replace "mailed" with "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 113

Collection Restrictions

ITA
225.1

Section 225.1 of the Act describes those collection activities of the Minister of National Revenue, in respect of an amount assessed under the Act, that are generally restricted until after a specified time, known as the "collection commencement day".

Collection-commencement day

ITA
225.1(1.1)(b) and (c)

Subsection 225.1(1.1) of the Act provides a rule of general application to describe the collection-commencement day in respect of an amount assessed under the Act. Paragraphs 225.1(1.1)(a) describes the collection-commencement day that applies in the case of the assessment of a former registered charity for revocation tax under subsection 188(1.1) of the Act.

Paragraph 225.1(1.1)(b) describes the collection-commencement day, that applies in the case of a penalty assessed under section 188.1 of the Act in respect of a charity, as one year after the day on which the notice of assessment was mailed. Paragraph 225.1(1.1)(c) provides a general rule in respect of other assessments under the Act, as 90 days after the notice of assessment was mailed.

Paragraphs 225.1(1.1)(b) and (c) are amended to replace "mailed" with "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Where a notice of objection is filed

ITA
225.1(2)

Subsection 225.1(2) of the Act provides an extension to the general rule in subsection 225.1(1) of the Act that restricts certain collection activities of the Minister of National Revenue, in respect of an amount assessed under the Act, until after the "collection commencement day" of a taxpayer. If a taxpayer serves a notice of objection to the assessment, those collection actions described in subsection 225.1(1) may not be taken until after the day that is 90 days after the day on which notice is mailed to the taxpayer that the Minister has confirmed or varied the assessment.

Subsection 225.1(2) is amended to replace "mailed" with "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Where an appeal is made to the Tax Court of Canada

Large corporations

ITA
225.1(7)(a)

Subsection 225.1(7) of the Act provides an exception to the rules in subsections 225.1(1), (1.1), (2) and (3) of the Act that restrict certain collection activities of the Minister of National Revenue, in respect of an amount assessed under the Act, until after the times specified in those provisions. Subsection 225.1(7) generally allows the Minister of National Revenue to take the collection actions described in subsection 225.1(1) in respect of one-half of any amount assessed in respect of a "large corporation", as defined in subsection 225.1(8) of the Act, whether or not an objection or appeal has been filed in respect of the assessment. In this regard, paragraph 225.1(7)(a) allows the Minister to commence those collections actions on or before the day that is 90 days after the day of the mailing of the notice of assessment.

Paragraph 225.1(7)(a) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 114

Assessment

ITA
227(10)(b)

Subsection 227(10) empowers the Minister of National Revenue to assess a person for various amounts, including penalties and other amounts payable by the person in respect of the failure to comply with the various provisions of the Act. Subsection 227(10) is amended to apply to a person or partnership that is required to pay a penalty under new subsection 237.3(8) for failure to comply with the reporting requirements in respect of a reportable transaction (within the meaning assigned under new subsection 237.3(1)).

This amendment applies in respect of avoidance transactions that are entered into after 2010 or that are part of a series of transactions that begins before 2011 and ends after 2010.

Clause 115

Reporting for Tax Avoidance Transactions

ITA
237.3

Backgrounder

Budget 2010 announced a public consultation process for a proposed reporting regime in respect of certain aggressive tax avoidance transactions. On May 7, 2010, a backgrounder and further details about the proposed reporting regime were released for a 60-day public consultation period, which ended on July 7, 2010.

As stated in Budget 2010, the main objective of the proposed reporting regime is to identify to the Canada Revenue Agency certain types of potentially abusive tax avoidance transactions that are not currently subject to any specific information reporting requirements under the Income Tax Act. To preserve the fairness and the integrity of Canada's self-assessment system, the Canada Revenue Agency must be able to properly review tax benefits claimed by taxpayers in their income tax returns, including tax benefits claimed in respect of aggressive tax planning arrangements. On the other hand, a balance must be struck between the need to protect the integrity of the Canadian income tax system and a taxpayer's entitlement to plan their affairs in a manner that legally minimizes their tax liability.

The submissions received in respect of the public consultation raised various issues on specific aspects of the proposals, many of which sought clarification regarding particular aspects of the criteria upon which the reporting requirement is based. In addition, it was suggested in several submissions that the proposals be further clarified in the Explanatory Notes.

The draft legislation addresses the issues raised, particularly when the proposed regime is considered as a whole. Notably, the definitions of "advisor" and "promoter" have been drafted to reflect comments received, as have the limitations on the penalty to which an advisor or promoter may be subject. As well, the "due diligence defence" in new subsection 237.3(11) is intended to address some of these issues.

Under the proposals, a transaction would be a reportable transaction if it is an avoidance transaction (as defined for the purpose of the general anti-avoidance rule in the Income Tax Act), or if it is a transaction that is part of a series of transactions that includes an avoidance transaction, if at any time any two of the hallmarks provided in the definition "reportable transaction" come into existence in respect of the avoidance transaction or series. Therefore, a transaction that is not an avoidance transaction, and a transaction in a series of transactions that does not include an avoidance transaction, would not be a reportable transaction, regardless of whether any of the hallmarks exist in respect of the transaction or series. Accordingly, it should be the case that normal commercial transactions that do not pose an increased risk of abuse would not have to be reported under this new reporting regime.

As noted, the proposed reporting regime also provides a due diligence defence for persons who could be subject to the proposed reporting requirements. To avail themselves of this defence, a person would be required to make reasonable efforts to determine whether a transaction is a reportable transaction and whether they are subject to an information reporting requirement in respect of the reportable transaction. If a transaction is a reportable transaction and the person is subject to an information reporting requirement, then the person must determine whether the reporting requirement to which they are subject has been satisfied in all respects by another person. If not, then the person must identify all the information to be provided in respect of the reportable transaction. If after making reasonable efforts to that effect, a particular person determines that no reporting requirement exists, or that another person has satisfied the reporting requirement to which the particular person is subject, the Minister of National Revenue may consider the particular person to have met the due diligence defence test. Whether a person has made such efforts would have to be determined according to the facts and circumstances of each case.

These explanatory notes provide further technical details about the proposed information reporting regime and also address and clarify specific issues raised during the consultations.

Overview

New section 237.3 of the Act contains rules in respect of a new information reporting regime meant to require the disclosure to the Minister of National Revenue (the "Minister") in a timely manner of certain aggressive tax avoidance transactions.

In general terms, this new section imposes a reporting obligation on certain persons in respect of avoidance transactions or series of transactions that includes an avoidance transaction if two of three hallmarks provided in the definition "reportable transaction" in new subsection 237.3(1) are applicable in respect of the avoidance transactions or the series. The particular hallmarks reflect certain circumstances that commonly exist in the context of tax avoidance transactions. The presence of these hallmarks often indicates a greater likelihood that the underlying transactions are ones that could be challenged under the existing provisions of the tax law

A reporting obligation is imposed on the particular person for whom a tax benefit could result from an avoidance transaction or series, any person who enters into an avoidance transaction for the benefit of the particular person as well as any "advisor" or "promoter" (within the meaning assigned under new subsection 237.3(1)) who is entitled to a fee in circumstances described in the definition "reportable transaction". A full and accurate information return must be filed in respect of each transaction that is a reportable transaction. The filing of an information return is for administrative purpose only, and cannot be construed as an admission by a person that section 245 applies to the transaction or that a transaction is part of a series of transactions.

If a full and accurate disclosure in respect of a reportable transaction is not made in accordance with this new section, the Minister may impose a late-filing penalty on the persons who have failed to satisfy their reporting obligations and redetermine the tax consequences of any person for whom a tax benefit could result from the undisclosed reportable transaction or series that includes that transaction. The redetermination could be made as if section 245 was deemed to apply, notwithstanding subsection 245(4).

Persons who have failed to fully satisfy their reporting obligations may be jointly and severally, or solidarily, liable to the penalty, subject to a limitation for advisors and promoters and the due diligence defence provided in new subsection 237.3(11). If the reporting obligation is satisfied in accordance with this new section only after the filing date, and any late-filing penalty and interest is paid, the Minister may allow a tax benefit from a reportable transaction disclosed late if the tax benefit satisfies all of the requirements of the otherwise applicable income tax law, including the general anti-avoidance rule.

New section 237.3 applies in respect of avoidance transactions that are entered into after 2010, as well as to avoidance transactions that are part of a series of transactions that commenced before 2011 and is completed after 2010. If the filing of an information return under proposed subsection 237.3 would be required before July 1, 2011, the information return is deemed to be filed before that day if it is filed before 2012.

Definitions

ITA
237.3(1)

New subsection 237.3(1) contains definitions that are relevant in determining, among other things, if an avoidance transaction or a transaction in a series of transactions is a "reportable transaction", a person is required to file an information return in respect of the "reportable transaction", and the amount of any penalty that may be payable by the persons required to file the prescribed information return where the return, does not provide full and accurate disclosure, is filed late, or is not filed at all.

The definition "reportable transaction" is the principal definition. The other definitions in new subsection 237.3(1) must be read in the context of that definition.

Definition of "reportable transaction"

ITA
237.3(1)

A "reportable transaction" means an avoidance transaction, within the meaning assigned by subsection 245(3), entered into by or for the benefit of a person, and each transaction entered into by or for the benefit of a person that is part of a series of transactions that includes the avoidance transaction, where at any time, any two of paragraphs (a) to (c) of that definition are applicable in respect of the avoidance transaction or series. Each transaction that is part of a series of transactions that includes an avoidance transaction is a separate reportable transaction, and this is also the case where a series of transactions includes more than one avoidance transaction. Whether a person would be considered to have entered into an avoidance transaction for the benefit of another person is to be based on the facts and circumstances of each case. The notes accompanying new subsection 237.3(2) provide further details in this regard.

Paragraphs (a) to (c) of the definition "reportable transaction" describe three sets of circumstances the existence of any two of which in respect of an avoidance transaction, or a series of transactions that includes the avoidance transaction, will cause that avoidance transaction, or each transaction that is part of that series, to be a "reportable transaction". As well, it is intended that paragraphs (a) to (c) apply in respect of a series of transactions if that series includes more than one avoidance transaction and if any two of the paragraphs are applicable in respect of one or more of those avoidance transactions. In other words, if a series of transactions includes more than one avoidance transaction, and any of paragraphs (a) to (c) are applicable in respect of one of those transactions while any of the paragraphs are applicable to another of those transactions, then each transaction in the series will be a reportable transaction.

Paragraph (a) – A "fee" in relation to the avoidance transaction or series of transactions that includes the avoidance transaction

Paragraph (a) of the definition "reportable transaction" under new subsection 237.3(1) refers to circumstances in which an "advisor" or "promoter" (within the meanings assigned by that new subsection), or any person who is not dealing at arm's length with an advisor or promoter, is entitled to any of three types of "fees". This paragraph applies from the perspective of the advisor or promoter who has or had an entitlement to a fee in respect of an avoidance transaction or series of transactions, and not from the perspective of the persons from whom the advisor or the promoter is or was entitled to receive the fee. In this explanatory note, a reference to an "advisor" or a "promoter" includes any person who is not dealing at arm's length with the advisor or promoter.

For the purpose of new section 237.3, a "fee" means any consideration that is, or could be, received or receivable, directly or indirectly and in any manner whatever, by an advisor or promoter in respect of an avoidance transaction, or a series of transactions that includes the avoidance transaction, for

  • providing advice or an opinion with respect to the transaction or series,
  • creating, developing, planning, organizing or implementing the transaction or series,
  • promoting or selling an arrangement, plan or scheme that includes, or relates to, the transaction or series,
  • preparing the documents supporting the transaction or series, including tax returns or any information returns to be filed under the Act, or
  • providing "contractual protection" (within the meaning assigned by new subsection 237.3(1)). See the explanation for paragraph (c) of the definition "reportable transaction" for more details on what constitutes "contractual protection".

The circumstances described in paragraph (a) would exist in respect of an avoidance transaction or series of transactions that includes the avoidance transaction if an amount meets the definition of "fee" under new subsection 237.3(1) (see the discussion in respect of that definition for more details) and that fee meets the characteristics of any of the three types of fees described in this paragraph.

The first type of fee, described in subparagraph (a)(i), is a fee of an advisor or promoter in respect of a transaction the computation of which is to any extent based on the amount of a tax benefit that could result from an avoidance transaction or series of transactions that include the avoidance transaction. Whether a fee is based on the amount of a tax benefit will depend on all the facts and circumstances relating to the consideration received. Examples of circumstances in which the amount of a fee of an advisor or promoter would be determined according to the amount of the tax benefit from the transaction include situations where the advisor or promoter sets a fee the amount of which is based, in whole or in part, on a percentage of the amount of the tax benefit from a transaction or series of transaction.

The second type of fee, described in subparagraph (a)(ii), refers to a fee of an advisor or promoter in respect of a transaction for which the advisor or promoter has or had an entitlement that is contingent upon the obtaining of, or the failure to obtain, a tax benefit from an avoidance transaction or series of transactions that includes the avoidance transaction. In contrast to subparagraph (a)(i) which is focused on fees the amount of which, or computation of the quantum of which, is dependent on the tax benefit sought under the avoidance transaction or series, the kinds of fees referred to in subparagraph (a)(ii) include the following:

  • A fee could be considered to be contingent upon the obtaining of a tax benefit from a transaction or series of transactions if the entitlement of the advisor or promoter to the fee under the relevant legal agreement arises upon the filing of an income tax return of a person that reflects the tax benefit, when the tax benefit is confirmed by the Minister after audit, if any court confirms the tax benefit in whole or in part, or upon the expiration of the applicable assessment periods that apply to the taxation year. A fee could also be considered to be contingent upon the obtaining of a tax benefit if it arises after the expiration of a given period of time agreed to by the advisor or promoter and the person for whom a tax benefit could result from the avoidance transaction or series, which period could be shorter than the applicable assessment periods that apply to the taxation year in which the tax benefit arises.
  • A fee to which an advisor or promoter is entitled in respect of an avoidance transaction or series of transactions may be considered to be contingent if it may be refunded, recovered or reduced, in any manner whatever, based upon the failure of a person to obtain a tax benefit from the avoidance transaction or series. This could be the case when the fee may be refunded to the payer, recovered by the payer, or reduced for the payer should the tax benefit that was expected to result from the avoidance transaction or series be denied to a person because of the application of any provision of the Income Tax Act, including the general anti-avoidance rule in section 245.

The third type of fee, described in subparagraph (a)(iii) is a fee that is attributable to the number of persons who enter into an avoidance transaction or series (or a similar avoidance transaction or series), or who have been provided access to advice or an opinion given by the advisor or promoter regarding the tax consequences from the avoidance transaction or series (or a similar avoidance transaction or series). Similar transactions or series include transactions or series having the same or similar structure and entered into by different taxpayers, when the objective of those transactions or series is to result in similar tax benefits for each of those taxpayers, even if those transactions or series may involve different properties or obligations. For example, a broadly marketed scheme in which different taxpayers acquire and finance property separately, but where the property that each taxpayer acquires is similar in nature and where the financing structure that each taxpayer enters into is similar, may be considered as "similar avoidance transactions".

Paragraph (b) – "Confidential protection" to the benefit of an advisor or promoter in respect of the details or structure of an avoidance transaction or series of transactions that includes the avoidance transaction

Paragraph (b) of the definition "reportable transaction" refers to circumstances in which an "advisor" or "promoter" obtains "confidential protection" in respect of an avoidance transaction or series of transactions that includes the avoidance transaction. In this explanatory note, a reference to an "advisor" or a "promoter" includes any person who does not deal at arm's length with the advisor or promoter.

Based on the definition "confidential protection", the circumstance described in paragraph (b) of the definition "reportable transaction" would exist in respect of an avoidance transaction or series of transactions that includes the avoidance transaction if an advisor or promoter in respect of the transaction or series has or had anything that would prohibit the disclosure to any person or to the Minister of details or the structure of the avoidance transaction or series that includes the avoidance transaction under which a tax benefit could result.

For greater certainty, the disclaiming or restricting of an advisor's liability shall not be considered confidential protection if there is no prohibition of the disclosure of details or the structure of the avoidance transaction of series of transactions that includes the avoidance transaction. An example would be a standard provision found in many tax opinions limiting an adviser's liability solely to his or her client and disclaiming liability to any third parties. See also the discussion in respect of the definition "confidential protection" in new subsection 237.3(1).

Paragraph (c) – "Contractual protection" obtained for a person for whom a tax benefit could result from an avoidance transaction or series of transactions that includes the avoidance transaction

Paragraph (c) of the definition "reportable transaction" refers to the circumstances in which "contractual protection" is obtained in respect of an avoidance transaction or series of transactions. The explanatory note accompanying the definition "contractual protection" in new subsection 237.3(1) provides further details in this regard. The circumstances provided in paragraph (c) would exist in respect of an avoidance transaction or series of transactions that includes the avoidance transaction if one of the following circumstances applies in respect of the avoidance transaction or series:

  • a person for whom a tax benefit could result from the avoidance transaction or series (the "particular person") has or had any form of protection the effect of which is described in paragraph (c);
  • another person who entered into the avoidance transaction for the benefit of the particular person, has or had any form of protection the effect of which is described in paragraph (c); or
  • any other person who does not deal at arm's length with the particular person, or with a person who entered into the avoidance transaction for the benefit of the particular person, has or had any form of protection the effect of which is described in paragraph (c).

"Contractual protection" in respect of a transaction or series of transactions means:

  • any form of insurance (other than standard professional liability insurance) or other protection (including an indemnity, compensation or a guarantee) that, either immediately or in the future and either absolutely or contingently, either
    • protects a person against a failure of the avoidance transaction or series of transactions to achieve any tax benefit,
    • pays for or reimburses any expense, fee, tax, interest, penalty or similar amount that may be incurred by a person in the course of a dispute in respect of a tax benefit from the avoidance transaction or series of transactions, or
  • any form or undertaking provided by a promoter, or by any person who does not deal at arm's length with the promoter, that provides, either immediately or in the future and either absolutely or contingently, assistance, directly or indirectly in any manner whatever, to a person in the course of a dispute in respect of a tax benefit from the transaction or series.

The first type of contractual protection described above refers to tax-result protection under which the taxpayer is compensated or indemnified should the tax benefit from the avoidance transaction or series for the taxpayer not be achieved under the law, in any form whatever. For greater certainty, an advance income tax ruling obtained from the Canada Revenue Agency by a person for whom a tax benefit could result from an avoidance transaction or series of transactions that includes an avoidance transaction is not to be considered contractual protection in respect of the avoidance transaction or series.

In addition, the first type of contractual protection could include situations where a taxpayer would be entitled to be compensated for any fees to be incurred during the course of an audit, an objection to an assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) (hereafter referred to in these notes as an "assessment"), an appeal of an assessment to the Tax Court of Canada or any other subsequent appeal to a court of higher jurisdiction, in respect of a tax benefit which could result from an avoidance transaction or series of transactions.

The second type of contractual protection described above refers to situations where, in respect of a transaction or series of transactions, a promoter (or a person who does not deal at arm's length with the promoter) provides an undertaking to assist a person in the course of a dispute in respect of a tax benefit from the transaction or series, even if done for no consideration. This would include situations where the promoter offers to provide to a person relevant documentation and guidance to dispute an assessment or file an appeal of any court's decision in respect of the transaction or series.

 "Contractual protection" would also exist in respect of an avoidance transaction or a series of transactions that includes the avoidance transaction if an advisor or promoter, or any person who does not deal at arm's length with the advisor or promoter, has or had contractual protection in respect of the avoidance transaction or series.

Fees that are contingent upon the obtaining of a tax benefit by a person are excluded from the application of paragraph (c) to preclude a double recognition of such fees. In the absence of this specific exclusion, an advisor's or a promoter's fee might be considered as both a type of "contractual protection" in paragraph (c) as well as the type of fee referred to in paragraph (a).

An advisor or promoter (for example, a promoter or an insurer) entitled to a "fee" for providing contractual protection in respect of an avoidance transaction, or a series of transactions that includes the avoidance transaction, may have a reporting obligation in respect of the avoidance transaction or series (along with the person who could benefit from the avoidance transaction or series) if an additional paragraph (hallmark) provided in the definition "reportable transaction" applies in respect of the avoidance transaction or series. For example, if in respect of an avoidance transaction or series of transactions that includes the avoidance transaction, a person obtains "contractual protection" from the advisor or promoter that the person will be compensated for all or a portion of a denied tax benefit or litigation costs (including a refund of any portion of a fee charged by the advisor or promoter) two hallmarks will exist if any portion of an advisor or promoter's fees were contingent on the tax benefit not being denied.

A person, including an advisor or promoter, who fails to file an information return as and when required may be liable to a penalty. The amount of certain fees of an advisor or promoter will be included in the amount of the penalty provided under new subsection 237.3(8). See the explanatory note accompanying new subsection 237.3(8) for further details in this regard.

Other definitions (some of which were discussed above)

ITA
Subsection 237.3(1)

"advisor"

The definition "advisor" is relevant in determining whether a person is required to file an information return in respect of an avoidance transaction or a transaction in a series of transactions that includes an avoidance transaction, and the amount of the penalty to which that person may be liable under new subsection 237.3(8).

An "advisor" means any person who, in respect of a transaction or a series of transactions, provides directly or indirectly in any manner whatever, any "contractual protection" in respect of the transaction or series, or any assistance or advice in creating, developing, planning, organizing or implementing the transaction or series, to any person. A person can be an "advisor" to a particular person who enters into a transaction and for whom a tax benefit could result from the transaction or series, or to a person who enters into a transaction for the benefit of another person. It is not intended that a person can be an advisor to himself or herself.

A person can also be an advisor in respect of a transaction or series if that person provides contractual protection, assistance or advice to any promoter or any other advisor in respect of the transaction of series of transactions, even though the person does not provide contractual protection, assistance or advice directly to the person who entered into the transaction or series. Thus, although an advisor would generally be a person whose business is to provide professional services or contractual protection to a person entering into a transaction or series, other persons can also be considered to be an "advisor" in respect of a transaction or series. More than one person may be an advisor in respect of a transaction or series of transactions.

A person or partnership that provides advice or representation to a person only in respect of an audit or tax dispute in relation to a particular transaction or series of transactions, and that, in respect of that transaction or series, was neither involved in the creation, development, planning, organizing or implementation of the transaction or series, nor in the providing of contractual protection, would not be an advisor in respect of that transaction or series.

"confidential protection"

 "Confidential protection" in respect of a transaction or series of transactions means anything that prohibits the disclosure to any person or to the Minister of the details or structure of the transaction or series under which a tax benefit results or would result but for section 245. Under the definition "reportable transaction", "confidential protection" would be relevant as a "hallmark" in respect of an avoidance transaction or series of transactions that includes an avoidance transaction only if an advisor or promoter has such protection in respect of the avoidance transaction or series. Accordingly, for example, rights of confidentiality of a person who enters into a transaction will not be a "hallmark" under paragraph (b) of the definition "reportable transaction" where those rights protect the confidentiality entitlement of a person against the person's advisors (such as the rights of a client vis-à-vis his or her legal advisor).

For greater certainty, the disclaiming or restricting of an advisor's liability (such as a disclaimer against liability to third parties, as is typical in tax opinions) shall not be considered confidential protection if there is no prohibition on the disclosure of the details or structure of the transaction of series. For more details, see explanatory notes accompanying the definition "reportable transaction" 

"contractual protection"

 "Contractual protection" means in respect of a transaction or series of transactions,

  • any form of insurance (other than standard professional liability insurance) or other protection, including, without limiting the generality of the foregoing, an indemnity, compensation or a guarantee that, either immediately or in the future and either absolutely or contingently,

(i) protects a person against a failure of the transaction or series to achieve any tax benefit from the transaction or series, or

(ii) pays for or reimburses any expense, fee, tax, interest, penalty or similar amount that may be incurred by a person in the course of a dispute in respect of a tax benefit from the transaction or series, and

  • any form of undertaking provided by a promoter, or by any person who does not deal at arm's length with a promoter, that provides, either immediately or in the future and either absolutely or contingently, assistance, directly or indirectly in any manner whatever, to a person in the course of a dispute in respect of a tax benefit from the transaction or series (see the explanatory notes accompanying paragraph (c) of the definition "reportable transaction" regarding disputes in respect of a tax benefit).

"fee"

A "fee" means any consideration that is, or could be, received or receivable, directly or indirectly in any manner whatever, in respect of a transaction or series of transactions by an advisor or a promoter, or any person who does not deal at arm's length with an advisor or a promoter, for undertaking any of the activities described in this definition. Consideration is assimilated to a "fee" for the purpose of new section 237.3 if that consideration is for providing advice or an opinion with respect to the transaction or series; for creating, developing, planning, organizing or implementing the transaction or series; for promoting or selling an arrangement, plan or scheme that includes, or relates to, the transaction or series; for preparing documents supporting the transaction or series, including tax returns or any information returns to be filed under the Act; or for providing "contractual protection" (within the meaning assigned by subsection 237.1(1)), in respect of the transaction or series.

"promoter"

"Promoter" means any person who, in respect of a transaction or series of transactions, promotes or sells an arrangement (as defined for the purposes of the definition), where it can reasonably be considered that the arrangement includes or relates to the transaction or series. A person is also a promoter if the person makes a statement or representation that a tax benefit could result from the arrangement, or accepts consideration in respect of the promotion or sale of the arrangement, or for the making of a statement or representation that a tax benefit could result from the arrangement. More than one person may be a promoter in respect of a transaction or series of transactions.

The definition "promoter" encompasses any person engaging in these activities or receiving such consideration whether as principal or agent and whether directly or indirectly.

"tax benefit"

"Tax benefit" has the meaning assigned by subsection 245(1) of the Act.

"transaction"

"Transaction" has the meaning assigned by subsection 245(1) of the Act.

Reporting obligation

ITA
237.3(2) to (4)

New subsections 237.3(2) to (4) relate to the reporting obligations imposed by section 237.3. In general terms:

  • An information return must be filed in respect of every reportable transaction by persons described in new subsection 237.3(2).
  • In the context of a series of transactions, a person for whom a tax benefit could result from a series of transactions that includes a reportable transaction has a reporting obligation in respect of each transaction that is part of the series. Other persons (in particular, advisors and promoters) subject to a reporting obligation may have an obligation to report all or part of the transactions in the series, depending on their particular circumstances.
  • The filing of an information return by any person that provides a full and accurate disclosure of all the transactions in a series of transactions would be considered to have been made by every person who has a reporting obligation in respect of any transaction of the series. The filing of an information return that contains full and accurate disclosure of a reportable transaction may be considered to have been filed by any other person that has a reporting obligation in respect of that transaction.
  • Unless information returns in respect of a reportable transaction, or of all the reportable transactions in the series of transactions, are filed with the Minister of National Revenue, the Minister can deny any tax benefit that could result from the reportable transaction, and impose a joint and several (or solidarity) penalty on every person who failed to report any reportable transaction. The person for whom a tax benefit could result from the reportable transaction or the series is liable to a late-filing penalty the amount of which would be equal to the total of all the fees that are described in paragraph (a) or (c) of the definition "reportable transaction" in new subsection 237.3(1) that an advisor or promoter is entitled to receive in the context of the transaction or series of transactions. An advisor or a promoter's liability is limited to the fee that that advisor or promoter is entitled to receive in respect of an undisclosed reportable transaction or in respect of the series that includes the transaction. As well, the due diligence defence (provided for in new subsection 237.3(11)) may apply in respect of the penalty. See the explanatory notes accompanying subsections 237.3(8) to (11) for further details about the penalty and the due diligence defence.

Subsection 237.3(2)

New subsection 237.3(2) imposes an obligation on certain persons to file an information return in respect of reportable transactions. This will be the case if, in general terms, any two of paragraphs (a) to (c) of the definition "reportable transaction" are applicable in respect of an avoidance transaction or series of transactions that includes the avoidance transaction. See the explanatory note accompanying the definition "reportable transaction" in new subsection 237.3(1) for more details in this regard.

A person for whom a tax benefit could result from an avoidance transaction or series of transactions that includes the avoidance transaction would be required to file an information return in respect of the avoidance transaction and, as the case may be, each transaction that is part of the series of transactions that includes the avoidance transaction.

A person who enters into an avoidance transaction for the benefit of another person for whom a tax benefit could result from the avoidance transaction or series would also be required to file an information return in respect of the avoidance transaction. Whether a person would be considered to have entered into an avoidance transaction for the benefit of another person would be based on the facts and circumstances of each case. A person could be considered as having entered into an avoidance transaction for the benefit of another person where it would be reasonable to consider that the person has undertaken the transaction or has arranged the transaction in order for the transaction to result in a tax benefit for the other person. The particular person for whom the tax benefit could result from the avoidance transaction may be unknown when the person enters into an avoidance transaction. For example, a corporation that undertakes a transaction or series of transactions to increase the paid-up capital of a class of shares of its capital stock might be considered to have undertaken the transaction or series for the benefit of its current or future shareholders, depending on the circumstances.

A person who is an "advisor" or "promoter", and any person with whom an advisor or promoter does not deal at arm's length, also may be subject to a reporting requirement if such a person is entitled to a fee (within the meaning assigned by new subsection 237.3(1)) in respect of the avoidance transaction or series of transactions that includes the avoidance transaction, in the circumstances described in paragraphs (a) or (c) of the definition "reportable transaction" under new subsection 237.3(1). In that case, the advisor or promoter (or relevant non-arm's length persons) would have a reporting obligation in respect of that avoidance transaction if it is a reportable transaction, or in respect of every transaction in the series that is a reportable transaction, depending on their circumstances. In addition to the person claiming the tax benefit, this would be the case for each of the persons mentioned above in the following circumstances:

  • The person is entitled to a fee that is to any extent based on the amount of a tax benefit from an avoidance transaction or a series of transactions that includes the avoidance transaction. See the explanatory notes accompanying the definition "reportable transaction" in new subsection 237.3(1) for further details in this regard.
  • The person is entitled to a fee that is to any extent contingent upon the obtaining of a tax benefit from an avoidance transaction or a series of transactions that includes the avoidance transaction, or the person is entitled to a fee that can be refunded, recovered or reduced upon the failure of a tax benefit to result from the avoidance transaction or series. See the explanatory notes accompanying the definition "reportable transaction" in new subsection 237.3(1) for further details in this regard.
  • The person is entitled to a fee that is to any extent attributable to the number of persons who enter into in an avoidance transaction or series, or a similar avoidance transaction or series, or who have been provided access to advice or an opinion given by the advisor or promoter regarding the tax consequences from the avoidance transaction or series, or a similar avoidance transaction or series. See the explanatory notes accompanying the definition "reportable transaction" in new subsection 237.3(1) for further details in this regard.
  • The person is entitled to a fee in respect of "contractual protection" obtained by or for the benefit of a person for whom a tax benefit could result from the avoidance transaction or series of transactions in the circumstances described in paragraph (c) of the definition "reportable transaction" in new subsection 237.3(1). See the explanatory notes accompanying the definition "reportable transaction" in new subsection 237.3(1) for further details in this regard.

The reporting requirements apply on a transaction-by-transaction basis. In other words, reporting is required in respect of each reportable transaction that is part of a series of transactions. More than one person may have a reporting requirement in respect of the same transaction. As well, every person mentioned above is required to file an information return for each reportable transaction in respect of each person for whom a tax benefit could result from the reportable transaction, or from the series of transactions that includes a reportable transaction. However, as described in the explanatory notes for the limitations provided in new subsections 237.3(3) and (4), the filing of a full and accurate information return by a person in respect of a particular transaction that is part of a series, which return accurately described each transaction that is part of the series, will satisfy the person's obligation in respect of each transaction that is part of the series. As well, the filing of a full and accurate information return in respect of the particular reportable transaction or each transaction that is part of the series, as the case may be, may also satisfy the reporting obligations of other persons in respect of the transaction or series, depending on each person's circumstances.

Subsection 237.3(3)

A person may have an obligation to report each transaction that is part of a series of transactions that includes an avoidance transaction. In such cases, new subsection 237.3(3) provides that that person will be deemed to have satisfied that person's reporting obligation in respect of each of those transactions if the person files an information return that fully and accurately discloses all of those transactions. This means that the person has to file only one information return in respect of the series of transactions to satisfy that person's reporting obligation, and not a separate information return for each transaction in the series. If a person, exercising due diligence, files an information return that is full and accurate in respect of all the transactions that the person should reasonably have been aware of, and those transactions are part of a larger series of transactions of which that person was unaware, the reporting obligation of that person would be considered to have been satisfied.

Subsection 237.3(4)

New subsection 237.3(4) provides the circumstances in which the filing by a person of an information return in respect of a reportable transaction could satisfy the reporting obligations of any other person who is also subject to a reporting obligation for the same transaction.

This new subsection provides that if any person is required to file an information return in respect of a reportable transaction, the filing of an information return with full and accurate disclosure in respect of the transaction is deemed to have been made by each person required to file an information return under new subsection 237.3(2) in respect of the transaction. In such case, each of those persons will be considered as having satisfied their respective reporting obligation in respect of the reportable transaction to the extent of that full and accurate disclosure.

However, the filing of the limited information return by that person would not satisfy the reporting obligation of any other person who has a broader or different reporting obligation in respect of the series. In such a case, every person who has a broader or different reporting obligation in respect of any undisclosed transactions in the series would still have an obligation to file information returns in respect of those transactions. See the explanatory note accompanying new subsection 237.3(11) for further details about the due diligence test.

Every person who fails to satisfy a reporting obligation in respect of any reportable transaction of the series is jointly and severally liable to pay a late-filing penalty under new subsection 237.3(8). If a person fails to satisfy his or her reporting obligation in respect of one or more reportable transactions, any fee described in paragraph (a) or (c) of the definition "reportable transaction" in new subsection 237.3(1) to which every advisor or promoter is entitled in the context of the transaction or series of transactions can be included in the amount of the penalty to which that person is liable in respect of an undisclosed reportable transaction (including the fee of any advisor or promoter who has satisfied his or her own reporting obligations in respect of parts only of the series of transactions). The penalty provided under new subsection 237.3(8) is subject to an exception for advisors and promoters and the possibility that the due diligence defence may apply. See the explanatory note accompanying new subsections 237.3(6) and 237.3(8) to (11) for further details about the application of the penalty and the due diligence defence.

Filing date

ITA
237.3(5)

Under new subsection 237.3(5), a person who is required to file an information return under new subsection 237.3(2) in respect of a reportable transaction must file the return with the Minister of National Revenue on or before June 30 of the calendar year following the calendar year in which the transaction first became a reportable transaction in respect of the person.

A transaction first becomes a reportable transaction to a person when the transaction is an avoidance transaction or is part of a series of transactions that includes an avoidance transaction and at least two of paragraphs (a) to (c) of the definition "reportable transaction" are applicable in respect of the avoidance transaction or series. The circumstances described in the definition "reportable transaction" in new subsection 237.3(1) may arise in respect of the avoidance transaction or series before or after the avoidance transaction has been entered into or the end of the series of transactions. Accordingly, the time for filing an information return for an advisor or a promoter may arise after the avoidance transaction or the end of a series of transactions.

For example, if a series of transactions is implemented over two calendar years, but a particular advisor provided assistance or advice only in the second year and only in respect of transactions that occur in the second year, the transactions will have first become reportable transactions in respect of that advisor only in that second year.

Determination of tax consequences

ITA
237.3(6)

New subsection 237.3(6) applies when an information return in respect of a reportable transaction is not filed in accordance with new subsection 237.3(2) and when any resulting penalty under new subsection 237.3(8) and any interest on that penalty are unpaid.

For a person to have the possibility to obtain a tax benefit from a reportable transaction, or a series of transactions that includes a reportable transaction, a full and accurate information return in respect of the reportable transaction and of each reportable transaction that is part of such a series that includes the transaction must be filed with the Minister of National Revenue on time. In accordance with new subsections 237.3(3) and (4), a person could obtain a tax benefit from the reportable transaction if that person's reporting obligation has been satisfied because another person has filed an information return that fully discloses the reportable transaction, or each reportable transaction that is part of a series of transactions, from which the tax benefit could result.

New subsection 237.3(6) provides that, if it applies to a transaction or series of transactions, then notwithstanding subsection 245(4), the tax consequences to a person in respect of the transaction or series can be determined as is reasonable in the circumstances under subsection 245(2) in order to deny a tax benefit that, but for section 245, would result, directly or indirectly, from the reportable transaction or series that includes that transaction. Subsections 245(5) to 245(8) would apply when subsection 245(2) is deemed to apply under new subsection 237.3.

The determination of the tax consequences based upon the deemed application of subsection 245(2) would have to be made in accordance with subsection 245(7). The tax consequences would be determined through a notice of assessment, reassessment, additional assessment or determination under subsection 152(1.11) involving the application of section 245.

If an information return that otherwise satisfies the requirements of new subsection 237.3(2) is filed after the period provided for under new subsection 237.3(5), and any late-filing penalty under new subsection 237.3(8) and interest thereon is fully paid to the Minister of National Revenue, the Minister may allow any tax benefit from the reportable transaction that is denied under this new subsection 237.3(6). However, in determining whether a person may obtain the tax benefit that was denied, the Minister of National Revenue may consider whether section 245 otherwise applies to the reportable transaction, including subsection 245(4). This is consistent with new subsection 237.3(12), which provides that the filing of an information return in respect of a reportable transaction under new section 237.3 is for administrative purposes only and cannot be considered as an admission by a person that section 245 applies to a transaction or transactions that are reported as required.

Assessments

ITA
237.3(7)

New subsection 237.3(7) provides to the Minister of National Revenue the authority to make such assessments, determinations and redeterminations as are necessary to give effect to new subsection 237.3(8), which provides a penalty for late-filing in respect of the reporting obligation imposed under new subsection 237.3(2).

Penalty for Late Filing - Joint and several liability

ITA
237.3(8) to (10)

When an information return in respect of a reportable transaction or, in the case of a series of transactions, each reportable transaction that is part of the series, is not filed in accordance with new subsection 237.3(2) and new subsection 237.3(5), every person who has failed to file an information return in respect of the reportable transaction or of each reportable transaction that is part of the series would be liable to pay a penalty.

The amount of the penalty is equal to the total of each amount that is a fee to which an advisor or a promoter in respect of the reportable transaction, or any person who does not deal at arm's length with such advisor or promoter, is entitled, either immediately or in the future and either absolutely or contingently, to receive in respect of the reportable transaction, of any transaction that is part of the series of transactions that includes the reportable transaction and of the series of transactions that includes the reportable transaction, if the fee is

  • described in paragraph (a) of the definition "reportable transaction" in subsection 237.3(1), or
  • in respect of "contractual protection" provided in circumstances described in paragraph (c) of that definition.

The explanatory notes accompanying the definition "reportable transaction" provide further details in this regard.

Under new subsection 237.3(9), every person who is subject to a penalty under subsection 237.3(8) is jointly and severally, or solidarily, liable to pay the penalty, subject to the limitation provided under new subsection 237.3(10) for advisors and promoters.

Under new subsection 237.3(10), an advisor or a promoter in respect of a reportable transaction that was not reported as and when required under new section 237.3 would be jointly and severally, or solidarily, liable to pay the penalty under new subsection 237.3(8) only to the extent of the fees that the particular advisor or promoter is entitled to receive in respect of the undisclosed reportable transaction or the series that includes that transaction, and that is included in the amount of that penalty.

Even if an advisor or promoter has fulfilled his or her reporting obligation in respect of a reportable transaction and is not liable to the penalty, the fees which that advisor or promoter is entitled to receive can be included in the amount of the penalty to which any other person may be liable should that other person fail to satisfy his or her reporting obligation in respect of other reportable transactions that are part of the same series of transactions. However, the liability of an advisor or a promoter for a late-filing penalty in respect of a failure to fulfill the reporting obligation is limited to the fees that the particular advisor or promoter is entitled to receive in respect of the reportable transaction or series.

Example

Assume that a taxpayer attempts to obtain tax benefits from a series of transactions that includes two avoidance transactions. The first avoidance transaction is part of the first five transactions in the series (the "first subset"), and the second avoidance transaction is part of the last five transactions in the series (the "second subset"). Also, assume that an advisor provides contractual protection to the taxpayer in respect of the first avoidance transaction and is entitled to receive a fee of $100. As well, a promoter is entitled to receive contingent fees of $50 in respect of the first avoidance transaction, another $50 in respect of the second avoidance transaction, and $25 in respect of the tax benefits to be derived from the series. The series of transactions began and ended in the same calendar year, and the contractual protection and the contingent fees also arose in that year.

Each transaction that is part of the series of transactions is a reportable transaction. That is because the advisor is entitled to a fee described in paragraph (c) of the definition "reportable transaction" in new subsection 237.3(1) in respect of the first avoidance transaction, and the promoter is entitled to a fee described in paragraph (a) of that definition in respect of the first and second avoidance transactions in addition to a fee in respect of the whole series. When two of the paragraphs under that definition apply in respect of one or more avoidance transactions that are part of a series of transactions or in respect of the series as a whole, each transaction that is part of the series is a reportable transaction. Also, in this example, it could be said that two paragraphs are applicable in respect of the series because one paragraph applies in respect of the first avoidance transaction of the series and another paragraph applies in respect of the second avoidance transaction.

Under new subsection 237.3(2), the taxpayer, the advisor and the promoter would each have a reporting obligation. Each would be required to file an information return in respect of each reportable transaction for which they have a reporting requirement no later than June 30 of the following calendar year, in accordance with new subsection 237.3(5).

The reporting obligation of the taxpayer, advisor and promoter would extend to each transaction that is part of the series of transactions.

The advisor, acting reasonably, decides to file on a timely basis an information return in respect of the first subset of transactions. Although the filing of an information return by the advisor in respect of the first subset would not be considered to have satisfied the reporting obligation of that advisor, the advisor would not be subject to any penalties under new section 237.3 because the advisor, acting reasonably, had no knowledge about the second subset and, therefore, the advisor's liability is limited under new subsection 237.3(11).

Although the reporting by the advisor of the first subset could be considered to have satisfied the reporting obligation of the taxpayer and the promoter in respect of the first subset, this does not relieve the taxpayer and the promoter in respect of transactions that are part of the second subset. Accordingly, the taxpayer and the promoter would be considered to have satisfied their respective reporting obligations only when their respective reporting obligations are satisfied in respect of the transactions that make up the entire series, including those that are part of the second subset. However, they did not file an information return in respect of the second subset.

Under new subsection 237.3(8), the promoter and the taxpayer are liable to a penalty because they did not satisfy their own respective reporting obligations in respect of all the reportable transactions of the series. The amount of the penalty to which a person is liable in respect of undisclosed reportable transactions includes not only the fees that are connected to those transactions, but also any fee in respect of any transaction that is part of the same series of transactions or in respect of the series as a whole. Therefore, the amount of the penalty to which the taxpayer and the promoter would potentially be liable is equal to $225 (which is the amount that is the total of all the fees that the advisor and the promoter are entitled to receive in respect of the first and second subset, and in respect of the series as a whole), and the taxpayer and the promoter would be jointly and severally (or solidarily) liable to pay the penalty under new subsection 237.3(9). However, under new subsection 237.3(10), the promoter's liability is limited to the fee that the promoter is entitled to receive in respect of the series which in this example is $125.

Due Diligence

ITA
237.3(11)

A person who is required to file an information return under new subsection 237.3(2) is liable for a penalty under new subsection 237.3(8) if the person does not file an information return in respect of every reportable transaction that the person is required to report, or does not do so on a timely basis. However, under new subsection 237.3(11), a person will not be liable to a penalty if it is determined that the person has exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. This limitation is commonly referred to as a "due diligence defence".

The due diligence defence applies in the context of the reporting obligations imposed upon the persons referred to in new subsection 237.3(2). Whether a person has exercised the degree of care, diligence and skill required will be based on the facts and circumstances of each case. It is intended that the application of the due diligence defence for the purpose of new section 237.3 will be based on the jurisprudence that applies in respect of similar defences for the purposes of other provisions of the Act.

A person for whom a tax benefit could result from a reportable transaction, or from a series of transactions that includes a reportable transaction, is required to file an information return in respect of the avoidance transaction, or of each transaction that is part of a series of transactions that includes the avoidance transaction, as the case may be. Such person is required to make reasonable and good faith efforts to determine whether a transaction is an avoidance transaction, or is part of a series of transactions that includes the avoidance transaction, and whether any two of paragraphs (a) to (c) of the definition "reportable transaction" are applicable to the avoidance transaction or series of transactions. If such a person is subject to a reporting requirement under new subsection 237.3(2) in respect of an avoidance transaction, then the person is also required to make reasonable and good faith efforts in identifying and disclosing full and accurate information in respect of each transaction that is part of a series of transactions that includes the avoidance transaction.

A person who enters into an avoidance transaction that is a reportable transaction for the benefit of another person is required to file an information return in respect of the avoidance transaction. Such person is required to exercise the same degree of care, diligence and skill as they would if they had entered into the reportable transaction on their own behalf.

A person who is an advisor or a promoter in respect of an avoidance transaction, or a series of transactions that includes an avoidance transaction, and any person who does not deal at arm's length with such advisor or promoter, would also be required to exercise adequate care, diligence an skill to determine whether a tax benefit could result from the avoidance transaction or series for a person, and whether any two of paragraphs (a) to (c) of the definition "reportable transaction" are applicable to the avoidance transaction or series.

Persons, other than those for whom a tax benefit could result for a transaction or series, will not be subject to a penalty under new subsection 237.3(8) if they file on a timely basis (or if they reasonably believe that another person has filed on a timely basis) an information return in respect of each transaction for which they reasonably believe, after making reasonable efforts, that they are subject to a reporting requirement. For example, if an advisor, acting reasonably, determines that a reportable transaction in respect of which the advisor provided advice, and is entitled to a fee described in paragraph (a) or (c) of the definition "reportable transaction" in new subsection 237.3(1), is part of a series of three transactions, the advisor will have satisfied his or her reporting obligation if he or she files (or, pursuant to new subsection 237.3(4), if another person files) a full and accurate report in respect of the three transactions that made up that part of the series even if, unknown to the advisor, the three transactions were actually part of a larger series of transactions.

Reporting not an admission

ITA
237.3(12)

New subsection 237.3(12) provides that the filing of an information return under new section 237.3(2) by a person in respect of a reportable transaction is not an admission by the person that section 245 applies in respect of any transaction, or that any transaction is part of a series of transactions.

If a required information return in respect of a reportable transaction is filed with the Minister of National Revenue and, in the case of a return that is late-filed, the applicable penalty and interest on the penalty is paid, the Minister may consider whether section 245 applies to the reportable transaction. If so, the Minister may determine any tax consequences to any person through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) with respect to the reportable transaction.

Application of sections 231 to 231.3

ITA
237.3(13)

New subsection 237.3(13) ensures that the provisions of sections 231 to 231.3 dealing with audits, inspections and powers of enforcement apply to any person who is required to file an information return in respect of a reportable transaction under new subsection 237.3(2) notwithstanding that, at the time of such audit or inspection, a return of income may not have been filed for the taxation year in which a tax benefit results, or would result but for section 245, from the reportable transaction or series of transactions that includes the reportable transaction.

Tax shelters and flow-through shares

ITA
237.3(14) to (16)

New subsection 237.3(14) provides that no information return is required to be filed under new subsection 237.3(2) in respect of a transaction if the transaction is one that would otherwise be a "reportable transaction" (within the meaning assigned by new subsection 237.3(1)) that is, or is part of a series that includes, the acquisition of a tax shelter or the issuance of a flow-through share in respect of which the appropriate information return under the tax shelter of flow-through share regime has been filed with the Minister of National Revenue.

New subsection 237.3(15) provides a computation rule in respect of the amount of any penalty to which a person may be liable under new section 237.3 and under the flow-through share or tax shelter rules. This subsection applies if a person fails to satisfy that person's reporting obligation in respect of a reportable transaction that is the acquisition of a tax shelter or the issuance of a flow-through share under all the relevant rules. In such case, the amount of the penalty, if any, to which that person may be liable under the flow-through share or tax shelter rules will reduce the amount of the penalty, if any, to which that person is liable to under new section 237.3. Other persons may have a reporting obligation under new subsection 237.3(2) in respect of the acquisition of the tax shelter or the issuance of the flow-through share. In such a case, every other person who fails to file an information return as and when required under new section 237.3 remains subject to the penalty under new subsection 237.3(8), the amount of which is determined without taking into account any reduction that applies to a person under new subsection 237.3(15).

New subsection 237.3(16) provides an anti-avoidance rule intended to prevent persons from inserting the acquisition of a tax shelter or the issuance of a flow-through share into a series of transactions for the purpose of avoiding the reporting requirements under new subsection 237.3(2).

Clause 116

Procedure and Evidence

ITA
244

Section 244 of the Act provides a number of evidentiary and procedural rules dealing with the administration and enforcement of the Act.

Mailing or sending date

ITA
244(14)

Subsection 244(14) of the Act provides a rule presuming the date shown on a notice of assessment made by the Minister of National Revenue, on a notice or notification made by the Minister under certain other provisions of the Act, to be the mailing date.

Subsection 244(14) is amended to provide as well that the date shown on a notice of assessment made by the Minister of National Revenue, on a notice or notification made by the Minister under certain other provisions of the Act, is presumed to be the date it is sent electronically.

Date when electronic notices sent

ITA
244(14.1)

New subsection 244(14.1) of the Act is added to allow for the electronic communication of those notices, referred to in various other provisions of the Act, that can currently be sent by the Minister of National Revenue by ordinary mail. Those other provisions are, where applicable, amended concurrently to replace the verb "to mail" with the verb "to send". This applies, for example, to notices of assessment of tax payable. It should be noted, however, that none of the provisions of the Act that specifically require notices to be served personally or by registered or certified mail are being amended.

In this regard, for security reasons, a notice, such as a notice of assessment of tax payable, is not itself to be conveyed electronically to a person. New subsection 244(14.1) provides generally that for the purposes of the Act a notice or other communication will be presumed to be sent by the Minister and received by a person or partnership on the date that an electronic message, informing the person or partnership that a notice or other communication is available in their secure electronic account, is sent to the person or partnership's electronic address.

The notice or other communication will only be presumed to be sent and received on the date the electronic message is sent if the message is sent to the electronic address most recently provided by the person or partnership to the Minister of National Revenue before that date.

An electronic message that pertains to a time sensitive notice or other communication will be distinguishable from other electronic messages in that it will inform the person or partnership that information has been made available in the person or partnership's secure electronic account that requires the person or partnership's immediate attention.

A notice or other communication will be considered to be made available only if it is posted by the Minister in the person or partnership's secure electronic account and the person or partnership has authorized that notices or other communications may be made available in this manner. A person or partnership may revoke their authorization for notices or other communications to be made in this manner, effective as of the day following such a revocation.

Date when Assessment Made

ITA
244(15)

Subsection 244(15) of the Act provides that a notice of assessment or notice of determination sent by the Minister of National Revenue is deemed to have been made on the day of mailing the notice of assessment or notice of determination.

Subsection 244(15) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 117

Request for Adjustments

ITA
245(6)

Section 245 of the Act provides rules regarding tax avoidance. Subsection 245(6) provides that a person can request an assessment, reassessment or additional reassessment that would be consequential to the application of subsection 245(2) of the Act in relation to an assessment of or a determination of a loss of another person. The request must be made within 180 days after the day of mailing of the notice of assessment or determination to the other person.

Subsection 245(6) is amended to replace "mailing" with "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to taxpayers in certain circumstances. For further details on the authority of the Minister of National Revenue to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Act.

Clause 118

Interpretation

ITA
248(1)

"employee life and health trust"

The definition "employee life and health trust" is added to subsection 248(1) to create a cross-reference to new subsection 144.1(2), which contains the conditions which must be met for a trust to be treated as an employee life and health trust.

"employee benefit plan"

"retirement compensation arrangement"

"salary deferral arrangement"

The definitions "employee benefit plan", "retirement compensation arrangement" and "salary deferral arrangement" are amended to exclude employee life and health trusts from the ambit of each definition. A trust that is a valid employee life and health trust will therefore not be an employee benefit plan, a retirement compensation arrangement, or a salary deferral arrangement.

These amendments apply after 2009.

"taxable Canadian property" 

"Taxable Canadian property" ("TCP") is a concept that is relevant primarily in relation to the taxation of non-residents and migrants. Paragraph (d) of the TCP definition was recently amended to effect an exclusion from its ambit of shares of corporations, and certain other interests, that do not derive their value principally from real or immovable property situated in Canada, Canadian resource property, or timber resource property (subject to a 60-month look-back rule).

Paragraph (d) is being further amended to ensure that the indirect or "look-through" rule does not extend through shares or other interests that are not themselves taxable Canadian property. For example, a non-resident may own, through a private holding company, shares of a Canadian public company that derive most of their value from real or immovable property situated in Canada. In such circumstances, it is possible that the shares of the private holding company could otherwise be TCP by virtue of the look-through to the real property, even though a direct holding by the non-resident of the public company shares might not be TCP. This amendment is intended to ensure the look-through rule does not, in these circumstances, apply where the public company shares are not themselves TCP.

This amendment applies in determining after March 4, 2010 whether a property is TCP of a taxpayer.

Clause 119

Acquiring Control

ITA
256

Subsection 256(7) of the Act describes circumstances in which control of a corporation is deemed to have been acquired, or not to have been acquired, for the purposes of certain provisions of the Act. Subsection 256(7) is amended to add new paragraphs (c.1) and (g), generally applicable after March 4, 2010.

ITA
256(7)(c.1)

The Act contains a number of provisions aimed at preventing or restricting the use of tax losses after an acquisition of control of a corporation if the losses pre-date the acquisition of control. These rules include a rule, found in existing paragraph 256(7)(c) of the Act, that in general terms deems an acquisition of control of an acquiring corporation, and corporations controlled by it, in the case of certain "reverse takeovers".

New paragraph 256(7)(c.1) clarifies that tax loss trading in similar "reverse takeover" transactions between a corporation and a SIFT trust, SIFT partnership (collectively, "SIFTs", and determined without reference to subsection 122.1(2) of the Act), or real estate investment trust ("REIT") is contrary to the existing scheme of the Act.

Subject to the exceptions in new subparagraphs 256(7)(c)(i), (ii) and (iii), new paragraph 256(7)(c.1) of the Act provides for control of a corporation (and of corporations controlled by it) to be deemed to have been acquired if, as part of a series of transactions or events (the "series"), two or more persons acquire shares at a particular time (the "acquisition time") in the corporation (the "acquiring corporation") in exchange for interests in a SIFT or REIT. For this purpose an exchange includes a redemption, surrender or distribution of an interest.

Consistent with the general scheme of the acquisition of control regime in subsection 256(7) of the Act, a deemed acquisition of control of a corporation will not occur under paragraph 256(7)(c.1) if, in respect of the exchange, there is a sufficient continuity of ownership of the corporation. Subparagraphs 256(7)(c.1)(i) and (ii) provide for this result.

Subparagraph 256(7)(c.1)(i) applies to a corporation (and to each corporation controlled by it immediately before the acquisition time) if more than 50% (measured by value) of the shares of the corporation were owned by a person (including a partnership) affiliated with the SIFT or REIT (including the SIFT or REIT itself) throughout a qualifying period. The qualifying period is the period that ends immediately before the acquisition time and that begins, generally, on July 14, 2008.  For corporations that come into existence on a particular day after July 14, 2008, the qualifying period begins on the particular day. If control of the corporation was last acquired by the affiliated SIFT or REIT at a particular time after the later of July 14, 2008 and the day on which the corporation came into existence, then the qualifying period begins at that particular time.  

Subparagraph 256(7)(c.1)(ii) applies to a corporation and each corporation controlled by it immediately before the acquisition time if, were a hypothetical person to have acquired all of the securities (carrying the extended meaning provided by subsection 122.1(1) of the Act) of the acquiring corporation that were actually acquired at or before the acquisition time and as part of the series, that hypothetical person would not have more than 50% of the shares (measured by value), and would not have control, of the acquiring corporation.

Subparagraph 256(7)(c.1)(iii) provides a third "safe harbour" under which a deemed acquisition of control of a corporation will not occur under paragraph 256(7)(c.1). That subparagraph applies to a corporation if as part of the series paragraph 256(7)(c.1) has already applied to deem an acquisition of control of the acquiring corporation.

New paragraph 256(7)(c.1) of the Act applies after 4:00 p.m. Eastern Standard Time March 4, 2010 (the "Application Time"). However, that paragraph will not apply to transactions that occur after that time if the parties to the transactions were at that time obligated, pursuant to an agreement in writing, subject to certain exceptions, to complete the transaction. Paragraph 256(7)(c.1) and new paragraph 256(7)(g) will both also apply to transactions that were completed or agreed to in writing between July 14, 2008 and the Application Time if the parties (for this purpose being the acquiring corporation and, as the case may be, the REIT or SIFT) to the transactions so elect in writing to the Minister of National Revenue.

Example

A SIFT partnership has held at all times after July 14, 2008 all of the shares of Aco, which in turn has owned at all times after July 14, 2008 all of the shares of Opco. The interests in the SIFT partnership consist of publicly-traded LP units, and GP units held by GPco.

Aco acquires all of the shares of GPco and all of the outstanding LP units in exchange for shares of Aco. The shares of Aco held by LP are redeemed in exchange for its interest in Opco. Subject to subparagraph 256(7)(c.1)(i) to (iii), paragraph 257(6)(c.1) would apply to deem there to be an acquisition of control of Aco and Opco.

Subparagraph 256(7)(c.1)(i) recognizes that the continuity of ownership of Aco and Opco has been preserved over the course of the reorganization of the SIFT partnership's business and, as a result, will cause paragraph 256(7)(c.1) not to apply to deem an acquisition of control of either corporation to arise solely because of that reorganization.

ITA
256(7)(g)

New paragraph 256(7)(g) of the Act applies to clarify that an acquisition of control of a corporation ("subsidiary corporation") does not occur upon a distribution of shares of the subsidiary corporation's capital stock to another corporation (the "acquiring corporation") by a trust on a SIFT trust wind-up event of the trust.

The requirements that must be met in order for paragraph 256(7)(g) to apply to the subsidiary corporation are that the following:

  • the distributing trust must be a SIFT wind-up entity – meaning a SIFT trust (determined without reference to subsection 122.1(2) of the Act), or a real estate investment trust;
  • the trust must control the subsidiary corporation immediately before the distribution;
  • the acquiring corporation must be the sole beneficiary of the trust immediately before the distribution and it must have come to be in that position as part of a series of transactions under which two or more persons acquired shares (the "exchange shares") of its capital stock in exchange for their interests as beneficiaries under the trust; and
  • had all of the exchange shares been acquired by a hypothetical person, the person would have more than 50% of the shares (measured by value), and would have control, of the acquiring corporation.

New paragraph 256(7)(g) of the Act applies after 4:00 p.m. Eastern Standard Time March 4, 2010 (the "Application Time"). However, that paragraph will not apply to transactions that occur after that time if the parties to the transactions were at that time obligated, pursuant to an agreement in writing, subject to certain exceptions, to complete the transaction. That paragraph and new paragraph 256(7)(c.1) will also apply to transactions that were completed or agreed to in writing between July 14, 2008 and the Application Time if the parties (for this purpose being the acquiring corporation and the trust) to the transactions so elect in writing to the Minister of National Revenue.

Example

Trust A, a SIFT trust, owns 100% of the shares of Aco, which in turn owns 100% of the shares of Cco. Bco is a corporation none of the shareholders of which is Trust A or person affiliated with Trust A. On July 1, 2010, Bco acquires from Trust A's unitholders all of the outstanding units of Trust A. As consideration for the trust units acquired, Bco issues to Trust A's unitholders shares of its capital stock carrying 51% of the votes of Bco. Trust A undergoes, on July 2, 2010, a SIFT trust wind-up event, and distributes its shares of Aco to Bco.

Paragraph 256(7)(g) of the Act will apply to deem there to be no acquisition of control of either Aco or Cco on the distribution.

Had the transactions described above occurred in February 2010, in order for paragraph 256(7)(g) of the Act to apply to deem no acquisition of control of Aco or Cco to occur on the distribution, Bco and Trust A must file a valid election with the CRA. However, the filing of the election would also result in the application of paragraph 257(6)(c.1) to the transactions under which Trust A's unitholders acquired capital stock carrying 51% of the votes of Bco. Specifically, that paragraph would apply to deem there to have been an acquisition of control of Bco in respect of that exchange.

Canada Pension Plan

Clause 120

Refund of Excess Contribution in Respect of Self-employed Earnings

CPP
38(4)

Paragraph 38(4)(a) of the Canada Pension Plan provides that the Minister of National Revenue may refund excess contributions made in respect of self employed earnings on mailing the assessment of the contribution. Paragraph 38(4)(b) provides that the Minister of National Revenue shall refund excess contributions made in respect of self employed earnings after mailing the notice of assessment, if application for the refund is made in writing by the contributor not later than four years after the end of the year to which the contributions relates.

Subsection 38(4) is amended to replace "mailing" with "sending", consequential to new provisions that allow the Canada Revenue Agency to provide notices electronically in certain circumstances. For further details on the authority of the Canada Revenue Agency to provide electronic notices, refer to the commentary for new subsection 244(14.1) of the Income Tax Act.

Employment Insurance Act

Clause 121

Mailing or Sending Date

EIA
85(4)

Subsection 85(4) of the Employment Insurance Act provides a rule presuming the date shown on a notice of assessment to be the mailing date.

Subsection 85(4) is amended to provide as well that the date shown on a notice of assessment is presumed to be the date it is sent electronically.

Date when electronic notice sent

EIA
85(5)

New subsection 85(5) of the Employment Insurance Act is added to allow for the electronic communication of those notices, referred to in various other provisions of the Employment Insurance Act, that can currently be sent by the Minister of National Revenue by ordinary mail. Those other provisions are, where applicable, amended concurrently to replace the verb "to mail" with the verb "to send". This applies, for example, to notices of assessment of an amount payable. It should be noted, however, that none of the provisions of the Employment Insurance Act that specifically require notices to be served personally or by registered or certified mail are being amended.

In this regard, for security reasons, a notice, such as a notice of assessment of an amount payable, is not itself to be conveyed electronically to a person. New subsection 85(5) provides generally that for the purposes of the Employment Insurance Act a notice or other communication will be presumed to be sent by the Minister and received by a person or partnership on the date that an electronic message, informing the person or partnership that a notice or other communication is available in their secure electronic account, is sent to the person or partnership's electronic address.

The notice or other communication will only be presumed to be sent and received on the date the electronic message is sent if the message is sent to the electronic address most recently provided by the person or partnership to the Minister of National Revenue before that date.

An electronic message that pertains to a time sensitive notice or other communication will be distinguishable from other electronic messages in that it will inform the person or partnership that information has been made available in the person or partnership's secure electronic account that requires the person or partnership's immediate attention.

A notice or other communication will be considered to be made available only if it is posted by the Minister in the person or partnership's secure electronic account and the person or partnership has authorized that notices or other communications may be made available in this manner. A person or partnership may revoke their authorization for notices or other communications to be made in this manner, effective as of the day following such a revocation.

Clause 122

Date when Assessment Made

EIA
102(14)

Subsection 102(14) of the Employment Insurance Act provides that an assessment is deemed to have been made on the day of mailing the assessment.

Subsection 102(14) is amended to replace "mailed" with "sent", consequential to new provisions in the Employment Insurance Act that allow the Canada Revenue Agency to provide notices electronically in certain circumstances. For further details on the authority of the Canada Revenue Agency to provide electronic notices, refer to the commentary for new subsection 85(5) of the Employment Insurance Act.

Clause 123

Refund of Excess Premium in Respect of Self-employed Earnings

EIA
152.3(1)

Paragraph 152.3(1)(a) of the Employment Insurance Act provides that the Minister of National Revenue may refund excess contributions made in respect of self employed earnings on mailing the assessment of the contribution. Paragraph 152.3(1)(b) provides that the Minister of National Revenue shall refund excess contributions made in respect of self employed earnings after mailing the notice of assessment, if application for the refund is made in writing by the contributor not later than three years after the end of the year to which the contributions relates.

Subsection 152.3(1) is amended to replace "mailing" with "sending", consequential to new provisions that allow the Canada Revenue Agency to provide notices electronically in certain circumstances. For further details on the authority of the Canada Revenue Agency to provide electronic notices, refer to the commentary for new subsection 85(5) of the Employment Insurance Act.

Universal Child Care Benefit Act

Clause 124

Definitions

Universal Child Care Benefit Act
2

Section 2 of the Universal Child Care Benefit Act provides definitions that apply to that Act.

The new definition "shared-custody parent" means a person who is a shared-custody parent for the purpose of Subdivision a.1 of Division E of Part I of the Income Tax Act. For more information on the new definition "shared-custody parent", see the commentary under section 122.6 of the Income Tax Act.

This amendment applies for payments in respect of months after June 2011.

Clause 125

Amount of Payment

Universal Child Care Benefit Act
4

Section 4 of the Universal Child Care Benefit Act provides for the amount of the Universal Child Care Benefit. This taxable benefit is delivered to eligible individuals in monthly payments based on the number of qualified dependants of the individual. An amount of $100 at the beginning of each month is provided for each child under six years of age who is a qualified dependant of an eligible individual (as defined in section 122.6 of the Income Tax Act).

Under the existing rules, only one individual can receive the benefit in respect of a qualified dependant each quarter. The definition of "eligible individual" in section 122.6 of the Income Tax Act is amended to allow two shared-custody parents to be eligible for the credit. For information on the amended definition "eligible individual" under section 122.6 of the Income Tax Act, see the commentary under that section.

Amended subsection 4(1) of the Universal Child Care Benefit Act provides that shared-custody parents can now both receive one-half of the full credit each month, in respect of the same qualified dependant. New paragraph 4(1)(a) of the Universal Child Care Benefit Act provides that a shared-custody parent of a qualified dependant will now be entitled to a benefit of $50 each month in respect of each qualified dependant under the age of six. New paragraph 4(1)(b) provides that an eligible individual who is not a shared-custody parent will continue to receive a monthly benefit of $100 in respect of each such dependant.

These amendments apply for payments in respect of months after June 2011.

Income Tax Regulations

Clause 126

Specified Leasing Property

ITR
1100(1.13)(a.1)

Paragraph 1100(1.13)(a) of the Income Tax Regulations (Regulations) defines property that is "exempt property" for the purposes of the specified leasing property rules, which may apply to restrict a taxpayer's deduction of capital cost allowance in respect of specified leasing property.

New paragraph 1100(1.13)(a.1) extends the application of the specified leasing property rules to property leased in certain circumstances, by excluding them from the definition of "exempt property". There are two conditions for property to be subject to new paragraph 1100(1.13)(a.1).

First, the property must be the subject of a lease to:

  • a person who is exempt from tax by reason of section 149 of the Act,
  • a person who uses the property in the course of carrying on a business, the income from which is exempt from tax under Part I of the Act by reason of any provision of the Act,
  • a Canadian government, or
  • a person not resident in Canada, except where the person uses the property primarily in the course of carrying on a business in Canada that is not a treaty-protected business.

Second, the property must have, at the time the lease was entered into, an aggregate fair market value in excess of $1,000,000.

New paragraph 1100(1.13)(a.2) is an anti-avoidance rule that applies if it may be reasonable to conclude that one of the main reasons for the existence of two or more leases is to meet the $1,000,000 exemption and thus avoid the application of paragraph (a.1).

These amendments apply to property that is the subject of a lease entered into after 4:00 p.m. Eastern Standard Time, March 4, 2010.

Clause 127

Classes 43.1 and 43.2 – Clean Energy Generation Assets

ITR
1104(13)

Subsection 1103(13) of the Regulations sets out various definitions that apply for the purpose of applying Class 43.1 (30% CCA rate) and Class 43.2 (50% CCA rate) in Schedule II to the Regulations.

Subsection 1104(13) is amended in four respects consequential to amendments made to Class 43.1 and 43.2, as proposed in the 2008 Budget.  First, the definition "food waste" is repealed. Second, the definition "food and animal waste" is added. Third, the definition "biogas" is amended to replace the reference to "food waste" with a reference to "food and animal waste" and to add a reference to "sludge from an eligible sewage treatment facility". Fourth, the definition "eligible waste fuel" is amended to add a reference to "biogas". These amendments apply to property acquired after February 25, 2008.

A fifth amendment concerns the definition "district energy system" and it deletes the words "that is primarily produced by electrical cogeneration equipment that meets the requirements of paragraphs (a) to (c) of Class 43.1, or paragraph (a) of Class 43.2, in Schedule II". This amendment concerns a proposal announced in the 2010 Budget and it is consequential to a related amendment that modifies subparagraph (a)(iii.1) and adds new subparagraph (d)(xv) of Class 43.1, which concern district energy equipment. This amendment applies to property acquired after March 3, 2010.

Clause 128

Canadian Renewable and Conservation Expenses (CRCE)

ITR
1219(1)(f)

Section 1219 of the Regulations defines "Canadian renewable and conservation expense" (CRCE) for the purposes of subsection 66.1(6) of the Act. CRCE is included in calculating a taxpayer's "Canadian exploration expense" pool, as defined by subsection 66.1(6), and is eligible to be renounced under a flow-through share agreement.  In general terms, subsection 1219(1) provides that CRCE is an expense incurred (for certain listed purposes) by a taxpayer in respect of a project for which it is reasonable to expect that at least 50% of the capital cost of the depreciable property to be used in the project would be included in Class 43.1 or 43.2 or would be so included but for subsection 1219(1).  Subsection 1219(2) excludes certain listed amounts from being CRCE under subsection 1219(1).

Paragraph 1219(1)(f) of the Regulations provides that CRCE may include an expense incurred for the drilling or completion of a well for a CRCE project.  Paragraph 1219(1)(f) is amended to provide that it does not apply to an expense in respect of a well that is, or can reasonably be expected to be, used for the installation of underground piping that is included in paragraph (d) of Class 43.1 or paragraph (b) of Class 43.2. This change is consequential to changes to paragraph (d) of Class 43.1 which are discussed below in the related explanatory note.

These amendments apply to expenses incurred after May 2, 2010.

Clause 129

Insurance Business Policy Reserves

ITR
Part XIV

Part XIV of the Regulations provides rules for determining the amount that may be deducted by an insurer in computing its income for a taxation year under Part I of the Act as a reserve in respect of liabilities under insurance policies.

Special Rules

ITR
1402

Division 3 of Part XIV of the Regulations contains special rules for the purposes of determining, under sections 1400 and 1401 of the Regulations, the reserves of insurance corporations. Division 3 of Part XIV of the Regulations consists of sections 1402, 1402.1 and 1403. Section 1402 of the Regulations is being amended.

Section 1402 of the Regulations provides that any amount determined under section 1400 or 1401 of the Regulations shall be determined on a net of reinsurance ceded basis.

Section 1402 of the Regulations is amended in two ways. The first amendment replaces the concept of "net of reinsurance ceded basis" with the concept of a "reinsurance recoverable amount". The new definition "reinsurance recoverable amount" in subsection 1408(1) of the Regulations provides that this amount is the amount of reinsurance assets that an insurer reports as recoverable from a reinsurer. This amendment ensures that the reserve calculations of insurance corporations under sections 1400 and 1401 of the Regulations continue to be determined net of reinsurance.

This amendment is consequential to changes to financial statement reporting that will occur with the adoption of IFRS by life insurers. Under IFRS, policy liabilities in respect of insurance contracts will be valued before taking into account reinsurance and corresponding reinsurance recoverable will be reported as assets.

Section 1402 of the Regulations is also amended to ensure that amounts in respect of deposit accounting insurance policies may no longer be included in the calculation of reserves under sections 1400 and 1401. For more detail on deposit accounting insurance policies, please refer to the commentary on the definition "deposit accounting insurance policy" in subsections 1408(1) of the Regulations and 138(12) of the Act.

These amendments apply to taxation years commencing after 2010.

Clause 130

Insurance Business Policy Reserves

ITR
1406

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. Section 1405 of the Regulations establishes the basis for determining the amount an insurer may deduct under subparagraph 138(3)(a)(ii) of the Act as a reserve in respect of its reported unpaid claims at the end of a taxation year under its life insurance policies in Canada.

Section 1406 of the Regulations provides rules for the purpose of computing the policy reserves under sections 1404 and 1405. Section 1406 ensures that the reserves claimed under sections 1404 and 1405 are net of any reinsurance ceded by the insurer and without reference to a liability in respect of a segregated fund other than a liability in respect of a guarantee.

Section 1406 is amended to refer to "reinsurance recoverable amount" to reflect concepts arising as a result of the adoption of IFRS effective in 2011. A relevant reinsurance recoverable amount is the amount of reinsurance recoverable in respect of the amounts used in the calculation of reserves in 1404 and 1405. For more detail, please refer to the commentary on section 1402 of the Regulations.

Section 1406 is also amended to ensure that amounts in respect of deposit accounting insurance policies may no longer be included in the calculation of reserves. For more detail on deposit accounting insurance policies, please refer to the commentary on the definition "deposit accounting insurance policy" in subsections 1408(1) of the Regulations and 138(12) of the Act.

These amendments apply to taxation years commencing after 2010.

Clause 131

Interpretation

ITR
1408

Division 5 of Part XIV of the Regulations contains rules of interpretation that apply for that Part. Division 5 consists of section 1408 of the Regulations.

ITR
1408(1)

Subsection 1408(1) provides a number of definitions and interpretive rules that apply for purposes of the rules in Part XIV of the Regulations dealing with the determination of an insurer's policy reserves.

"deposit accounting insurance policy"

The new definition "deposit accounting insurance policy" in subsection 1408(1) of the Regulations imports that definition from subsection 138(12) of the Act. The definition is relevant to the rules of application contained in sections 1402 and 1406 of the Regulations. Under those rules of application, deposit accounting insurance policies are ignored in determining amounts under sections 1400, 1401, 1404 and 1405 of the Regulations.

For further details, readers may refer to the commentary on the new definition "deposit accounting insurance policy" in section 138(12) of the Act, and the commentary on sections 1402 and 1406 of the Regulations.

"reinsurance recoverable amount"

The new definition "reinsurance recoverable amount" refers to the amount of reinsurance assets that an insurer reports as recoverable from a reinsurer. It is used in sections 1402 and 1406 to ensure that the reserve calculations of insurance corporations under Part XIV of the Regulations continue to be determined net of reinsurance.

For further details, readers may refer to the commentary on sections 1402 and 1406.

These amendments apply to taxation years commencing after 2010.

ITR
1408(8)

New subsection 1408(8) provides that any reference in Part XIV of the Regulations to an amount reported as an asset or a liability of an insurer is to be construed as a reference to the amount that is reported as a liability in the taxpayer's year-end balance sheet accepted by the insurer's relevant authority, if applicable, or that is reported in a manner consistent with the requirements that would have applied had such reporting been required.

This amendment applies to taxation years commencing after 2010.

Clause 132

Insurers

ITR
Part XXIV

Part XXIV of the Regulations provides rules for determining the property of an insurer that is considered to be used or held by it in the year in the course of carrying on an insurance business in Canada for various purposes under the Act and the Regulations.

ITR
2400(1)

"Canadian reserve liabilities"

An insurer's "Canadian reserve liabilities" is defined as the total amount of the insurer's liabilities and reserves (other than liabilities and reserves in respect of a segregated fund) in respect of life insurance policies in Canada, fire insurance policies issued or effected in respect of property situated in Canada and insurance policies of any other class covering risks ordinarily within Canada at the time the policy was issued or effected.

The definition of "Canadian reserve liabilities" is amended as a consequence of the adoption of IFRS, requiring liabilities and reserves to be computed gross of reinsurance for the purposes of IFRS. To maintain a calculation of reserve liabilities on a net of reinsurance basis for Canadian income tax purposes, reinsurance recoverable is deducted from liabilities and reserves to determine the Canadian reserve liabilities.

"reinsurance recoverable"

The definition "reinsurance recoverable" is amended to refer to the amount of reinsurance assets that an insurer reports as recoverable from a reinsurer. 

"Canadian investment fund"

An insurer's Canadian investment fund at the end of a taxation year represents the quantum of investment property considered to be used in the insurer's Canadian insurance business as of the end of the year.

The description of B of the formula in subparagraph (a)(i) of the definition "Canadian investment fund" is amended consequential to the amendment to the definition "Canadian reserve liabilities", to ensure that references to policies referred to in that definition remain accurate as a result of the restructuring of that definition.

Clause (b)(i)(A) of the definition "Canadian investment fund" is amended to remove references to "reinsurance recoverables", and consequential to the amendment to the definition "Canadian reserve liabilities", to ensure that references to policies referred to in that definition remain accurate as a result of the restructuring of that definition.

For further details, readers may refer to the commentary on the definition "Canadian reserve liabilities" in subsection 2400(1).

"equity limit"

Subsection 2401(4) of the Regulations provides that an insurer cannot designate for a taxation year Canadian equity property in excess of its equity limit for the year. Subparagraph (b)(i) of the definition "equity limit" is amended to remove the former clause (B) from the calculation of an insurer's equity limit. Subparagraph (b)(i) defines the equity limit of a non-resident insurer (other than a life insurer) to be the amount by which its mean Canadian reserve liabilities exceed the total of certain amounts, those amounts including a function of the insurer's reinsurance recoverables. As the computation of the insurer's Canadian reserve liabilities are concurrently being amended to be net of reinsurance recoverable, the reduction of the equity limit by a function of the insurer's reinsurance recoverables is redundant.

For further details, readers may refer to the commentary on the definition "Canadian reserve liabilities" in subsection 2400(1).

"weighted Canadian liabilities"

The definition "weighted Canadian liabilities" is relevant for the purposes of the amended definitions "Canadian investment fund" and "equity limit".

An insurer's weighted Canadian liabilities is the total of its weighted Canadian life insurance and accident and sickness insurance policy liabilities (to the extent they exceed its policy loans) and its other non-weighted Canadian insurance liabilities (excluding those in respect of a segregated fund or a debt incurred or assumed to acquire a particular property).

The definition is amended consequential to the adoption of IFRS. The amendments ensure that weighted Canadian liabilities are reported net of reinsurance assets in respect of Canadian liabilities.

For further details, readers may refer to the commentary on the definition "Canadian reserve liabilities" in subsection 2400(1).

"weighted total liabilities"

The definition "weighted Canadian liabilities" is relevant for the purposes of the amended definitions "Canadian investment fund" and "equity limit".

An insurers weighted total liabilities is similar to its weighted Canadian liabilities except that the former includes an insurer's world-wide insurance liabilities rather than only its Canadian insurance liabilities. (For further details see the above commentary to the definition of "weighted Canadian liabilities".)

The definition "weighted total liabilities" is amended consequential to changes related to the adoption of IFRS. The amendments ensure that weighted total liabilities are reported net of reinsurance assets in respect of total liabilities.

For further details, readers may refer to the commentary on the definition "Canadian reserve liabilities" in subsection 2400(1).

These amendments apply to taxation years commencing after 2010.

ITR
2400(9)

Certain of the accounting rules that insurance corporations must follow are being changed effective for fiscal years beginning on or after January 1, 2011. These changes are in addition to the accounting rule changes that were adopted effective for fiscal years beginning on or after October 1, 2006. The changes that are currently being made impact the tax rules that apply to insurance corporations for taxation years commencing after 2010. Subsection 2400(9) is added to ensure that the same form of transition rule that applied for the accounting rule changes effective for fiscal years beginning on or after October 1, 2006, applies in respect of the adoption of IFRS effective for fiscal years beginning on or after January 1, 2011.

For further details, readers may refer to the commentary on subsection 138(12) of the Act.

This amendment applies to taxation years commencing after 2010.

Clause 133

Designation Rules

ITR
2401(2)

Subsection 2401(2) sets out rules that an insurer is required to follow in designating investment property for a taxation year in respect of its insurance businesses carried on in Canada in the year. Paragraphs 2401(2)(b) and (c) are amended to remove subparagraphs (b)(ii) and (c)(ii), which referenced reinsurance recoverables. As the computation of the insurer's Canadian reserve liabilities are concurrently being amended to be net of reinsurance recoverable, the reduction of the insurer's reinsurance recoverables is redundant.

For further details, readers may refer to the commentary on the definition "Canadian reserve liabilities" in subsection 2400(1).

This amendment applies to taxation years commencing after 2010.

Clause 134

Registered Charities

ITR
Part XXXVII

Part XXXVII of the Regulations provides rules related to the calculation of a prescribed amount for the purpose of determining the disbursement quota of a charity as defined under subsection 149.1(1) of the Act. Part XXXVII is amended consequential to the amendment of that definition.

The heading "Charitable Foundations" to Part XXXVII of the Regulations is amended to refer to "Registered Charities", as this Part is amended to apply to all registered charities.

This amendment applies for taxation years that end on or after March 4, 2010.

Interpretation

ITR
3700

Section 3700 of the Regulations is repealed as the definitions found in subsection 149.1(1) of the Act apply to sections 3701 and 3702 of the Regulations. The reference to the definition "limited-dividend housing company" in paragraph 149(1)(n) of the Act is moved to subparagraph 3702(1)(c)(i) of the Regulations.

These amendments apply for taxation years that end on or after March 4, 2010.

Clause 135

Disbursement Quota

ITR
3701

Section 3701 of the Regulations applies for the purpose of calculating the disbursement quota of a charity as defined in subsection 149.1(1) of the Act. Consequential to the amendment of that definition, subsection 3701(1) now refers to the description of B of the formula in that definition. In addition, section 3701 is amended to refer to a "registered charity" instead of a "charitable foundation", as the disbursement quota applies to all registered charities.

These amendments apply for taxation years that end on or after March 4, 2010.

Clause 136

Determination of Value

ITR
3702

Section 3702 of the Regulations applies for the purpose of calculating the value of property in calculating the disbursement quota of a charity, as referred in subsection 3701(1) of the Regulations. Section 3702 is amended to refer to a "registered charity" instead of "charitable foundation" (when applicable), as this calculation applies to all registered charities. However, in the case where a property is a "non-qualified investment" of a private foundation (as defined in subsection 149.1(1) of the Act), paragraph 3702(1)(a) of the Regulations is amended to refer more specifically to a private foundation.

A reference to the definition "limited-dividend housing company" in paragraph 149(1)(n) of the Act is added in paragraph 3702(1)(c) of the Regulations, as section 3700 of the Regulations is repealed (see the commentary for section 3700 of the Regulations). In addition, the formula in paragraph 3702(1)(c) is amended to change the percentage to 3.5 per cent, to reflect the corresponding percentage in the definition "disbursement quota" in subsection 149.1(1) of the Act.

These amendments apply for taxation years that end on or after March 4, 2010.

Clause 137

Denial of Underlying Foreign Tax

ITR
5907(1) "underlying foreign tax"
5907(1.03) to (1.06)

The amendment to the definition "underlying foreign tax" ("UFT") in subsection 5907(1) of the Regulations and the introduction of new subsections 5907(1.03) to (1.06) are analogous to the amendment to the definition "foreign accrual tax" in subsection 95(1) of the Act and the introduction of new subsections 91(4.1) to (4.5). Please refer to the commentary to those provisions for further details. The only notable distinction between the two sets of rules is the absence, in the UFT rules, of an equivalent to paragraph 91(4.1)(b) of the Act. This is because the UFT rules are relevant only for the computation of deductions in computing the taxable income of a taxpayer under section 113 of the Act and, as such, the rules in subsection 96(1) of the Act that deem a partnership to be a person resident in Canada are not applicable. In other words, a partnership cannot be a "taxpayer" for the purposes of the UFT rules.

The amendment to the definition "underlying foreign tax" in subsection 5907(1) of the Regulations and the introduction of new subsections 5907(1.03) to (1.06) apply to income or profits tax paid, and amounts referred to in subsections 5907(1.1) and (1.2) of the Regulations, in respect of the income of a foreign affiliate of a corporation for taxation years of the foreign affiliate that end in taxation years of the corporation that end after March 4, 2010. However, there are transitional rules for taxation years of the corporation that end on or before Announcement Date.

Clause 138

Definitions

ITR
Part LXXXVI

Part LXXXVI of the Regulations provides rules for determining "taxable capital employed in Canada". Although Part I.3 tax has been eliminated, a corporation's "taxable capital employed in Canada" remains relevant for several purposes, including Part VI of the Act, which levies a tax on the capital of financial institutions. Section 8600 defines a number of terms for the purposes of Part LXXXVI of the Regulations and Part I.3 of the Act.

ITR
8600

"total reserve liabilities"

The term "total reserve liabilities" is relevant in determining the taxable capital employed in Canada of insurance corporations that carry on a life insurance business. The definition is amended as a consequence of the adoption of IFRS, requiring liabilities and reserves to be computed gross of reinsurance for the purposes of IFRS. To maintain a calculation of reserve liabilities on a net of reinsurance basis, the reinsurance recoverable is deducted from liabilities and reserves to determine the total reserve liabilities. This formula ensures that the calculations of taxable capital employed in Canada for purposes of Part LXXXVI of the Regulations and Parts I.3 and VI of the Act continue to be determined net of reinsurance.

This amendment applies to taxation years commencing after 2010.

Clause 139

Prescribed Payments

ITR
9500

New regulation 9500 defines "prescribed payments" which are, in general terms, payments which may, under new paragraph 144.1(2)(g) of the Act, be permitted to be made under the terms of an employee life and health trust without jeopardizing the trust's status. Prescribed payments as currently defined are relevant only to the health care trust being established for retired auto workers who are former employees of General Motors of Canada Limited or Chrysler Canada Incorporated or of related entities.

Due to the complexity of the proceedings surrounding the establishment of this trust, the former employers have continued to pay designated employee benefits to their former employees pending the proposed settlement of the trust. The parties intend that the trust will, after it has been settled, reimburse the employers for these payments.

Payments for certain administrative services that may be provided by the employers are also accommodated as prescribed payments.

In order to be a prescribed payment, paragraph (c) requires that the recipient of the payment acknowledge that it will include the payment in computing its income.

New regulation 9500 applies after 2009.

Clause 140

Class 10 in Schedule II

Schedule II to the Regulations provides a list of classes of depreciable properties for the purpose of deducting capital cost allowance (CCA), and the description of properties that are to be included in each Class. A portion of the capital cost of depreciable property is deductible as CCA each year, with the CCA rate for each type of property set out in the Regulations.

ITR
Class 10(v) (30% CCA rate)

In general, paragraph (v) of Class 10 applies to equipment used to interface between a cable distribution system and electronic products used by consumers such as televisions and radios where the equipment is designed primarily to augment channel capacity or to decode signals (i.e., a television set-top box). Paragraph (v) of Class 10 is amended so that it does not apply to property included in new paragraph (b) of Class 30, which is described below in the explanatory note that accompanies that amendment.

This amendment applies to taxation years that end after March 4, 2010.

Clause 141

Class 30 in Schedule II

ITR
Class 30 (40% CCA rate)

Class 30 applies – in general - to unmanned telecommunication spacecraft acquired before 1990. Class 30 is amended to create new paragraphs (a) and (b), with paragraph (a) referring to property currently described by Class 30.  In general, new paragraph (b) applies to equipment acquired after March 4, 2010 that is used for the purpose of effecting an interface with a cable or satellite distribution system (other than a satellite radio distribution system) if the equipment is designed primarily to augment channel capacity or to decode signals (i.e., cable and satellite television set-top boxes). The equipment must not have been used for any purpose before March 5, 2010.

Clause 142

Class 43.1 in Schedule II

ITR
Class 43.1 (30% CCA rate) and 43.2 (50% CCA rate)

Class 43.1 provides a 30% accelerated capital cost allowance rate for certain renewable energy and energy conservation equipment.  Class 43.2 provides a 50% accelerated capital cost allowance rate. In general terms, Class 43.2 applies to property described in Class 43.1 if the property is acquired on or after February 23, 2005 and before 2020. Unlike Class 43.1, however, Class 43.2 applies to co-generation property described in paragraphs (a) to (c) of Class 43.1 only if the heat rate of an eligible co-generation system attributable to fossil fuel does not exceed a 4,750 BTU requirement instead of the 6,000 BTU requirement.

Class 43.1 (and indirectly Class 43.2) is amended in a number of respects more fully described below.

Budget 2008 measures

1. Active Solar Equipment and Ground Source Heat Pump Systems

Subparagraph (d)(i) of Class 43.1 applies to certain active solar heating equipment and ground source heat pump system equipment.

Subclause (d)(i)(A)(II) is amended to remove the requirement that the liquid or gas heated by equipment that is part of a ground source heat pump system be used directly in an industrial process or in a greenhouse. Under the revised provision, the equipment must be part of a ground source heat pump system that meets the standards set by the Canadian Standards Association for the design and installation of earth energy systems. Such equipment includes piping (including above or below ground piping and the cost of drilling a well, or trenching, for the purpose of installing that piping).

Clause (d)(i)(B) is amended to exclude energy equipment that backs up equipment described in subclause (A)(I) or (II).

2. Geothermal Equipment

Subparagraph (d)(vii) is amended to remove the requirement that eligible geothermal equipment be "above-ground". A related change extends eligibility to geothermal "equipment that consists of piping (including above or below ground piping and the cost of drilling a well, or trenching, for the purpose of installing that piping)".

3. Equipment used Primarily to Collect Landfill Gas and Digester Gas

Subparagraph (d)(viii) is amended to remove the requirement that equipment used to collect landfill gas and digester gas be "above-ground". A related change extends eligibility to "equipment that consists of piping (including above or below ground piping and the cost of drilling a well, or trenching, for the purpose of installing that piping)".

4. Equipment used Primarily to Generate Heat Energy from an Eligible Waste Fuel

Subparagraph (d)(ix) is amended to remove the requirement that the industrial process or greenhouse that uses the heat energy be "of the taxpayer or lessee". Accordingly, a taxpayer's equipment that generates heat in an eligible manner remains eligible under the provision if the heat is sold to another person who uses it in their industrial process or greenhouse.  In addition, eligibility requires that the heat be generated primarily from eligible waste fuel and, while eligibility is not denied if fossil fuel is also consumed as a minority fuel source, no other fuel may be consumed for the purposes of the provision. Both "eligible waste fuel" and "fossil fuel" are defined in subsection 1104(13) of the Regulations.

5. Equipment used Primarily to Convert Wood Waste or Plant Residue into Bio-oil

Subparagraph (d)(xi) currently requires that the bio-oil be used "primarily for the purpose of generating electricity". This use requirement is extended to apply where the bio-oil is "used primarily for the purpose of generating heat that is used directly in an industrial process or a greenhouse, generating electricity or generating electricity and heat". In addition, the provision is amended to remove the requirement that the bio-oil be used by "the taxpayer or lessee".  Accordingly, a taxpayer's equipment that generates bio-oil in an eligible manner remains eligible under the provision if the bio-oil is sold to another person who uses it primarily to generate heat that is used directly in an industrial process or a greenhouse, to generate electricity or to generate electricity and heat.

6. Equipment that is part of a system used Primarily to Produce and Store Biogas

Subparagraph (d)(xiii) currently requires that eligible equipment be used primarily to "produce, store and use" biogas. Subparagraph (d)(xiii) is amended to apply to eligible equipment that is used primarily to "produce and store" biogas. Accordingly, a taxpayer's equipment that produces and stores biogas in an eligible manner remains eligible under the provision if the biogas is sold to another person. 

Generally, these amendments apply to property acquired after February 25, 2008.

Budget 2010 measures

Class 43.1 (and indirectly Class 43.2) is amended in two additional respects. In general, the following amendments to Class 43.1 apply to new property acquired after March 3, 2010.

First, Class 43.1 is amended to apply to heat recovery equipment used in a broader range of applications.

  • Subparagraph (a)(iii) of Class 43.1 – which applies to heat recovery equipment used primarily in eligible cogeneration systems – is amended to remove the restriction that requires the recovered thermal waste to be reused in a cogeneration process of the same type that generated it, and
  • Subparagraph (d)(iv) of Class 43.1 – which applies to heat recovery equipment – is amended to remove the restriction that requires the recovered thermal waste to be reused directly in an industrial process (other than in an industrial process that generates or processes electrical energy).  No change is made to the requirement that the recovered thermal waste be generated directly in an industrial process (other than an industrial process that generates or processes electrical energy). In addition, subparagraph (d)(iv) does not apply to property that is employed in re-using recovered heat (such as property that is part of the internal heating or cooling system of a building or electrical generating equipment), is a building or is equipment that recovers heat primarily for use for heating water in a swimming pool.

Second, Class 43.1 is broadened in the following two respects.

  • Subparagraph (a)(iii.1) of Class 43.1 – which applies to "district energy equipment" – is amended to, in general, incorporate in the subparagraph a "primarily supplied" test that is analogous to the test deleted from the definition "district energy system" in subsection 1104(13) of the regulations, and
  • New subparagraph (d)(xv) is added to extend Class 43.1 (and Class 43.2 indirectly) eligibility to a taxpayer's district energy equipment (as defined in subsection 1104(13)) if the equipment is used as part of a district energy system (as defined in subsection 1104(13)) that uses thermal energy that is primarily supplied by equipment that is an eligible ground source heat pump system, active solar system, heat recovery equipment or a combination of these energy sources.

Part 4

Amendments in Respect of Excise Duties and Sales and Excise Taxes

Air Travellers Security Charge Act

Clause 143

Definitions

ATSCA
2

Section 2 of the Air Travellers Security Charge Act defines terms that apply for the purposes of the Act.

Subclauses 143(1) and (2)

Definitions

ATSCA
2

"fiscal month"

"Fiscal month" is currently defined as a period determined under section 16 for purposes of reporting and paying a charge. The definition is amended to mean a period determined under subsection 16(1). This amendment is consequential to the renumbering of section 16.

"fiscal half-year"

The Act is amended to add a new definition, "fiscal half-year". The new definition is relevant for the purposes of new subsection 16(2) of the Act, which introduces rules for the determination of a new reporting period of a fiscal half-year of a designated air carrier, and new subsection 16.1(2), which provides that the Minister of National Revenue may authorize a designated air carrier, under certain conditions, to have a reporting period of a fiscal-half year.

"Fiscal half-year" means a fiscal half-year as determined under subsection 16(2).

"fiscal year"

The Act is amended to add a new definition, "fiscal year". The new definition is relevant for the purposes of new subsection 16(2) of the Act, which introduces rules for the determination of a new reporting period of a fiscal half-year of a designated air carrier, and new subsection 16.1(2), which provides that the Minister of National Revenue may authorize a designated air carrier, under certain conditions, to have a reporting period of a fiscal-half year.

"Fiscal year" of a designated air carrier means the same period that is the carrier's fiscal year under Part IX of the Excise Tax Act.

"reporting period"

The Act is amended to add a new definition, "reporting period". The new definition is introduced in conjunction with new section 16.1, which provides that the reporting period of a designated air carrier is a fiscal month, unless the carrier meets conditions set out in new subsection 16.1(2) and is authorized by the Minister to have a reporting period of a fiscal half-year.

"Reporting period" means a reporting period as determined under section 16.1.

The amendments come into force on Royal Assent.

Clause 144

Associated persons

ATSCA
5.1

New rules with respect to associated persons are introduced for the purposes of determining whether a carrier is entitled to file returns on a fiscal half-year basis rather than on a monthly basis. Eligibility for filing based on a fiscal half-year is determined by reference to the total of all charges and amounts collected or required to be collected by the carrier and any person associated with the carrier in the current or previous fiscal year.

Subsection 5.1(1) provides that a particular corporation is associated with another corporation for the purposes of the Air Travellers Security Charge Act if they are considered to be associated pursuant to subsections 256(1) to (6) of the Income Tax Act.

Subsection 5.1(2) provides that a person (other than a corporation) is associated with a particular corporation if that person or a group of associated persons of which the person is a member controls the corporation.

Subsection 5.1(3) sets out the circumstances in which a person will be treated as being associated with a partnership and with a trust.

Subsection 5.1(4) states that a person is associated with another person if both persons are associated with a third person.

The amendment comes into force on Royal Assent.

Clause 145

Fiscal periods

ATSCA
16

Section 16 currently provides rules for the determination of a fiscal month of a designated air carrier. The heading before section 16 is amended by replacing "Fiscal Month" with "Fiscal Periods", consequential to the introduction of a new reporting period of a fiscal half-year of a carrier. In addition, current section 16 is renumbered as subsection 16(1) and new subsection 16(2) is introduced to set out rules for the determination of a new fiscal half-year reporting period.

New subsection 16(2) provides that the fiscal half-years of a designated air carrier are 1) the period beginning on the first day in a fiscal year of the carrier and ending on the earlier of the last day of the sixth fiscal month and the last day in the fiscal year, and 2) the period, if any, beginning on the first day of the seventh fiscal month and ending on the last day in the fiscal year.

Reporting periods

ATSCA
16.1

New section 16.1 determines the reporting period of a designated air carrier for filing a return under the Act, consequential to the introduction of a new reporting period of a fiscal half-year of a carrier. Currently, all carriers are required to file a return each fiscal month.

New subsection 16.1(1) provides that the reporting period of a designated carrier is a fiscal month.

New subsection 16.1(2) provides that, despite new subsection 16.1(1), the Minister of National Revenue may authorize a carrier to have a reporting period of a fiscal half-year, subject to certain conditions. For example, the total of all charges and amounts collected or required to be collected under the Act by the carrier and any person associated with the carrier shall not exceed $120,000 in the current or previous fiscal year.

New subsection 16.1(3) provides that an authorization under new subsection (2) is deemed to be revoked if the total of all charges and amounts collected or required to be collected under the Act by a carrier and any person associated with the carrier exceeds $120,000 in a fiscal year. The revocation is effective as of the first day after the end of the fiscal half-year in which the excess occurs.

New subsection 16.1(4) enables the Minister to revoke an authorization in specific circumstances, such as when an air carrier, in writing, requests the Minister to do so.

New subsection 16.1(5) provides that, upon the revocation of an authorization under subsection (4), the Minister shall send a notice in writing and shall specify the fiscal month for which the revocation becomes effective.

New subsection 16.1(6) provides that, if a revocation under subsection (4) becomes effective before the last day of a fiscal half-year of a carrier that is authorized under new subsection (2), the period beginning on the first day of the fiscal half-year and ending immediately before the first day of the fiscal month for which the revocation becomes effective is deemed to be a reporting period of the carrier.

The amendments come into force on Royal Assent.

Clause 146

Returns and payments

ATSCA
17(2)

Subsection 17(2) currently requires every designated air carrier that is registered or is required to register to, by the end of the first month following the fiscal month, file monthly returns, calculate in the return the total of all charges collected and other amounts collected as or on account of charges, and pay an amount equal to that total to the Receiver General.

This subsection is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a carrier under new subsection 16.1(2).

The amendment comes into force on Royal Assent.

Clause 147

Waiving or reducing interest

ATSCA
30(1)

Subsection 30(1) provides that the Minister of National Revenue may waive or reduce interest payable under the Act.

This subsection is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a carrier under new subsection 16.1(2).

The amendment comes into force on Royal Assent.

Clause 148

Deduction of refund

ATSCA
32(4)

Subsection 32(4) entitles an air carrier that has refunded or credited an amount under subsection 32(1) or 32(2) and that has issued a document in accordance with subsection 32(3) to deduct the amount refunded or credited from the amount payable to the Receiver General in the fiscal month in which the document is issued provided that the amount refunded or credited was included in the amount payable by the air carrier for that or a preceding fiscal month.

This subsection is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a carrier under subsection 16.1(2).

The amendment comes into force on Royal Assent.

Clause 149

Restriction

ATSCA
33(3)(a)

Section 33 provides that a person who pays an amount under the Act that is in fact not payable may apply for a refund of the amount.

Paragraph 33(3)(a) currently provides that a refund under this section shall not be paid to a person to the extent that the amount was taken into account as an amount to be paid by the person in respect of one of their fiscal months and the Minister of National Revenue has assessed the person for the month under section 39.

This paragraph is amended by replacing the terms "fiscal months" and "month" with the terms "reporting periods" and "period" respectively, consequential to the introduction of a new reporting period of a fiscal half-year of a carrier under subsection 16.1(2).

The amendments come into force on Royal Assent.

Clause 150

Restriction re trustees

ATSCA
35

Section 35 currently provides that a refund to which a person was entitled prior to the appointment of a trustee in bankruptcy for the person shall not be paid unless all returns for the fiscal months that ended before the appointment of the trustee have been filed and all outstanding payments for those fiscal months have been paid.

This section is amended by replacing the term "fiscal months" with the term "reporting periods", consequential to the introduction of a new reporting period of a fiscal half-year of a carrier under new subsection 16.1(2).

The amendment comes into force on Royal Assent.

Clause 151

Refund on reassessment

ATSCA
39(4)

Section 39 authorizes the Minister of National Revenue to assess or reassess persons for their liabilities under the Act.

Subsection 39(4) currently requires the Minister to provide a refund if a person has paid an amount that exceeds the amount determined on reassessment to have been payable in respect of that fiscal month.

This subsection is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a carrier under new subsection 16.1(2).

The amendment comes into force on Royal Assent.

Clause 152

Failure to file a return when required

ATSCA
53

Section 53 imposes a penalty where a person fails to file a return for a fiscal month as and when required under the Act.

This section is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a carrier under new subsection 16.1(2).

The amendment comes into force on Royal Assent.

Clause 153

Waiving or cancelling penalties

ATSCA
55(1)

Subsection 55(1) provides that the Minister is authorized, on or before the day that is ten calendar years after the end of a fiscal month of a person, to waive or cancel any penalty payable under section 53 in respect of a return for the fiscal month.

This subsection is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a carrier under new subsection 16.1(2).

The amendment comes into force on Royal Assent.

Clause 154

Limitation period

ATSCA
72(2.2)(a)(i) and (ii)

Subsection 72(2.2) of the Act generally specifies the limitation period for the collection of a charge debt under the Act to be 10 years after the earliest day that the Minister of National Revenue can commence an action to collect the charge debt or, if a notice of assessment or a notice for payment of amount under subsection 80(1) is mailed to or served on a person, the last day on which one of those notices is mailed or served.

Subparagraphs 72(2.2)(a)(i) and (ii) are amended to replace the term "mailed" with the term "sent", consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances. For further details on the authority of the Minister to provide electronic notices, refer to the commentary for new subsection 83(9.1).

The amendment comes into force on Royal Assent.

Clause 155

Evidence and procedure

ATSCA
83

Section 83 of the Act provides a number of evidentiary and procedural rules dealing with the administration and enforcement of the Act. The section is amended to allow the Minister of National Revenue to provide electronic notices to persons under certain circumstances. Other provisions of the Act, where applicable, are amended concurrently to replace the verb "to mail" with the verb "to send". This applies, for example, to the notice of assessment in respect of a charge debt sent by the Minister under provisions governing the limitation period. However, those provisions of the Act that specifically require notices to be served personally or by registered or certified mail are not being amended to provide for the electronic communication of notices.

The amendments to section 83 come into force on Royal Assent. 

Subsection 83(9) - Mailing or sending date

Subsection 83(9) currently provides that the date of mailing of any notice or demand that the Minister of National Revenue is required or authorized under the Act to send or mail to a person is deemed to be the date of the notice or demand.

Subsection 83(9) is amended to add that the day of sending of a notice or demand electronically is deemed to be the date of the notice or demand. This is consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances. The amended wording of subsection (9) also clarifies that the concept of "send" includes to mail.

Subsection 83(9.1) - Date when electronic notice sent

New subsection 83(9.1) is added to allow for the electronic communication of notices under the Act that can currently be sent by the Minister of National Revenue by ordinary mail.

Although for security reasons a notice of assessment is not itself to be conveyed electronically to a person, new subsection 83(9.1) provides that a notice or other communication will be, for the purposes of the Act, deemed to be sent by the Minister and received by a person on the date that an electronic message (informing the person that a notice or other communication is available in their secure electronic account) is sent to the person's most recent electronic address. A notice or other communication is considered to be made available if it is posted by the Minister in the person's secure electronic account, the person has authorized that notices or other communications may be made available in this manner and the person has not revoked their authorization in a manner specified by the Minister.

Subsection 83(10) - Date when assessment made

Subsection 83(10) currently provides that a notice of assessment sent by the Minister of National Revenue to a person is deemed to have been made on the day of mailing the notice of assessment.

Subsection 83(10) is amended to replace the term "mailing" with the term "sending", consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances.

Excise Act

Clause 156

Determination of periods for semi-annual returns

EA
36.1

New section 36.1 of the Excise Act is introduced to set out rules for the determination of a new six-month filing period. Currently, all brewers are required to file a return each month.

New subsection 36.1(1) provides that the six-month periods of a licensed brewer are 1) the period beginning on January 1 and ending on June 30, or the portion of that period, if any, that ends before the month of which a revocation becomes effective, and 2) the period beginning on July 1 and ending on December 31, or the portion of that period, if any, that ends before the month on which a revocation becomes effective.

New subsection 36.1(2) provides that the Minister of National Revenue may authorize a licensed brewer to make returns for six-month periods, subject to certain conditions. For example, the total of all duties imposed, levied and collected on beer and malt liquor brewed by the brewer and any person associated with the brewer shall not exceed $120,000 in the current or previous year.

New subsection 36.1(3) provides an authorization provided under new subsection (2) is deemed to be revoked if the total of all duties imposed, levied and collected on beer and malt liquor by a brewer and any person associated with the brewer exceeds $120,000 in a year. The revocation is effective as of the first day after the end of the six-month period in which the excess occurs.

New subsection 36.1(4) enables the Minister to revoke an authorization in specific circumstances, such as when a brewer, in writing, requests the Minister to do so.

New subsection 36.1(5) provides that, upon the revocation of an authorization under subsection (4), the Minister shall send a notice in writing and shall specify the month for which the revocation becomes effective.

The amendments come into force on Royal Assent.

Clause 157

Time for making return

EA
37

Section 37 currently provides that returns be made on or before the tenth working day of each month. This section is amended by renumbering section 37 as subsection 37(1) and by adding new subsection 37(2), consequential to the introduction of a new semi-annual reporting period.

New subsection 37(2) requires licensed brewers that are authorized by the Minister to make a return for a six-month period under new subsection 36.1(2) to make such returns on or before the tenth working day of the month following the end of that six-month period.

The amendment comes into force on Royal Assent.

Excise Act, 2001

Clause 158

Definitions

EA, 2001
2

Section 2 of the Excise Act, 2001 defines terms that apply for the purposes of the Act.

"fiscal half-year"

The Act is amended to add a new definition, "fiscal half-year". The new definition is relevant for the purposes of new subsection 159(1.1) of the Act, which introduces rules for the determination of a new reporting period of a fiscal half-year of a person, and new subsection 159.1(2), which provides that the Minister of National Revenue may authorize a person, under certain conditions, to have a reporting period of a fiscal-half year.

"Fiscal half-year" means a fiscal half-year as determined under subsection 159(1.1).

"fiscal year"

The Act is amended to add a new definition, "fiscal year". The new definition is relevant for the purposes of new subsection 159(1.1) of the Act, which introduces rules for the determination of a new reporting period of a fiscal half-year of a person, and new subsection 159.1(2), which provides that the Minister of National Revenue may authorize a person, under certain conditions, to have a reporting period of a fiscal-half year.

"Fiscal year" of a person means the same period that is the person's fiscal year under Part IX of the Excise Tax Act.

"reporting period"

The Act is amended to add a new definition, "reporting period". The new definition is introduced in conjunction with new section 159.1, which provides that the reporting period of a person is a fiscal month, unless the person meets conditions set out in new subsection 159.1(2) and is authorized by the Minister to have a reporting period of a fiscal half-year.

"Reporting period" means a reporting period as determined under section 159.1.

The amendments come into force on Royal Assent.

Clause 159

Associated persons

EA, 2001
6(3) to (6)

New rules with respect to associated persons are introduced for the purposes of determining whether a person is entitled to file returns on a fiscal half-year basis rather than on a monthly basis. Eligibility for filing based on a fiscal half-year is determined by reference to the total of all duties payable under Part 4 by the person and any person associated with the person in the current or previous fiscal year.

Subsection 6(3) provides that a particular corporation is associated with another corporation for the purposes of the Excise Act, 2001 if they are considered to be associated pursuant to subsections 256(1) to (6) of the Income Tax Act.

Subsection 6(4) provides that a person (other than a corporation) is associated with a particular corporation if that person or a group of associated persons of which the person is a member controls the corporation.

Subsection 6(5) sets out the circumstances in which a person will be treated as being associated with a partnership and with a trust.

Subsection 6(6) states that a person is associated with another person if both persons are associated with a third person.

The amendment comes into force on Royal Assent.

Clause 160

Fiscal periods

EA, 2001
159

The heading before section 159 is amended by replacing the term "Fiscal Month" with the term "Fiscal Periods", consequential to the introduction of a new reporting period of a fiscal half-year of a person.

The amendment comes into force on Royal Assent.

Clause 161

Determination of fiscal half-years

EA, 2001
159(1.1)

Currently, section 159 provides rules for the determination of a fiscal month of a person. New subsection 159(1.1) is introduced to set out rules for the determination of a new fiscal half-year reporting period.

New subsection 159(1.1) provides that the fiscal half-years of a person are 1) the period beginning on the first day in a fiscal year of the person and ending on the earlier of the last day of the sixth fiscal month and the last day in the fiscal year, and 2) the period, if any, beginning on the first day of the seventh fiscal month and ending on the last day in the fiscal year.

The amendment comes into force on Royal Assent.

Clause 162

Reporting periods

EA, 2001
159.1

New section 159.1 determines the reporting period of a person for filing a return under the Act, consequential to the introduction of a new reporting period of a fiscal half-year of a person. Currently, all licensees are required to file a return each fiscal month.

New subsection 159.1(1) provides that the reporting period of a person is a fiscal month.

New subsection 159.1(2) provides that, despite subsection 159.1(1), the Minister of National Revenue may authorize a category of licensee that is an excise warehouse licensee who does not hold tobacco products, a spirit licensee, a wine licensee, or a licensed user to have a reporting period of a fiscal half-year, subject to certain conditions. For example, in respect of a category of licensee, the total of all duties payable under Part 4 by the person and any person associated with the person shall not exceed $120,000 in the current or previous fiscal year.

New subsection 159.1(3) provides that an authorization under subsection (2) is deemed to be revoked if any of the conditions described in paragraphs 2(d) to (h) is no longer met, as of the first day after the end of the fiscal half-year, or if an excise warehouse licensee begins to hold manufactured tobacco or cigars, as of the first day of the fiscal month in which the licensee begins to hold the tobacco or cigars.

New subsection 159.1(4) enables the Minister to revoke an authorization in specific circumstances, such as when a person, in writing, requests the Minister to do so.

New subsection 159.1(5) provides that, upon the revocation of an authorization under subsection (4), the Minister shall send a notice in writing and shall specify the fiscal month for which the revocation becomes effective.

New subsection 159.1(6) provides that, if a revocation under paragraph (3)(b) or subsection (4) becomes effective before the last day of a fiscal half-year of a person that is authorized under new subsection (2), the period beginning on the first day of the fiscal half-year and ending immediately before the first day of the fiscal month for which the revocation becomes effective is deemed to be a reporting period of the person.

The amendments come into force on Royal Assent.

Clause 163

Filing by licensee

EA, 2001
160

Section 160 generally requires persons who are licensed under the Act to file monthly returns and calculate and remit any duty payable. The return for each of a person's fiscal months must be filed, and the duty, if any, remitted by the end of the first month following the fiscal month.

This section is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendment comes into force on Royal Assent.

Clause 164

Minimum interest and penalty

EA, 2001
170(4)

Section 170 imposes interest at the prescribed rate on amounts a person has failed to pay under the Act. Subsection 170(4) allows the Minister of National Revenue to waive interest of less than $25, under certain circumstances.

Subsection 170(4) is amended by replacing the terms "fiscal month" and "month" with the terms "reporting period" and "period" respectively, consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendments come into force on Royal Assent.

Clause 165

Restriction

EA, 2001
176(2)(a)

Section 176 provides that a person who pays an amount under the Act that is in fact not payable may apply for a refund of the amount, provided the person applies for the refund within 2 years of the day the amount was paid.

Paragraph 176(2)(a) is amended by replacing the terms "fiscal month" and "month" with the terms "reporting period" and "period" respectively, consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendments come into force on Royal Assent.

Clause 166

Restriction re trustees

EA, 2001
178

Section 178 provides that a refund or other payment that a person was entitled to prior to the appointment of a trustee in bankruptcy for the person shall not be paid unless all returns for the fiscal months that ended before the appointment of the trustee have been filed and all outstanding payment for those fiscal months have been paid.

This section is amended by replacing the term "fiscal months" with the term "reporting periods", consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendment comes into force on Royal Assent.

Clause 167

Assessments

EA, 2001
188

Section 188 authorizes the Minister of National Revenue to assess or reassess persons for their liabilities under the Act.

This section is amended by replacing the terms "fiscal month" and "month" with the terms "reporting period" and "month" respectively, consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendments come into force on Royal Assent.

Clause 168

Limitation period for assessments

EA, 2001
191

Section 191 sets out the limitation periods for assessing duty, interest and other amounts payable under the Act.

Section 191 is amended by replacing the terms "fiscal month" and "month" with the terms "reporting period" and "period" respectively, consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendments come into force on Royal Assent.

Clause 169

Scope of notice

EA, 2001
193(2)

Section 193 requires the Minister of National Revenue to provide a notice of assessment to any person who has been assessed. A notice of assessment may include assessments of any number or combination of fiscal months, refunds or amounts payable under the Act.

Subsection 193(2) is amended by replacing the term "fiscal months" with the term "reporting periods", consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendment comes into force on Royal Assent.

Clause 170

Bankruptcies

EA, 2001
212

This section determines the liabilities and obligations under the Act of a bankrupt's trustee, a receiver appointed to manage or wind up a person's business or property, or other representative, in specific circumstances.

This section is amended by replacing the term "fiscal month" with "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendment comes into force on Royal Assent.

Clause 171

Failure to file return

EA, 2001
251.1

Section 251.1 imposes a penalty where a person fails to file a return for a fiscal month as and when required under the Act.

This section is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendment comes into force on Royal Assent.

Clause 172

False statements or omissions

EA, 2001
253

Section 253 provides that a person who, knowingly or under circumstances amounting to gross negligence, is involved in the making of a false statement or omission in a return or other document made in respect of a fiscal month or activity is liable to a penalty.

This section is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendment comes into force on Royal Assent.

Clause 173

Waiving or reducing failure to file penalty

EA, 2001
255.1

Section 255.1 provides that the Minister is authorized, on or before the day that is ten calendar years after the end of a fiscal month of a person, to waive or reduce any penalty payable under section 251.1 in respect of a return for the fiscal month.

This section is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendment comes into force on Royal Assent.

Clause 174

Limitation period

EA, 2001
284(2.2)(a)(i) and (ii)

Subsection 284(2.2) of the Act generally specifies the limitation period for the collection of a tax debt under the Act to be 10 years after the earliest day that the Minister of National Revenue can commence an action to collect the tax debt or, if a notice of assessment or a notice for payment of amount under subsection 254(1) or 294(1) is mailed to or served on a person, the last day on which one of those notices is mailed or served.

Subparagraphs 284(2.2)(a)(i) and (ii) are amended to replace the term "mailed" with the term "sent", consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances. For further details on the authority of the Minister to provide electronic notices, refer to the commentary for new subsection 301(9.1).

The amendment comes into force on Royal Assent.

Clause 175

Liability re transfers not at arm's length

EA, 2001
297(1)(e)(i)

Section 297 provides an anti-avoidance rule for non-arm's length transfers of property by a person liable to make a payment under the Act.

Subparagraph 297(1)(e)(i) is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 159.1(2).

The amendment comes into force on Royal Assent.

Clause 176

Evidence and procedure

EA, 2001
301

Section 301 of the Act provides a number of evidentiary and procedural rules dealing with the administration and enforcement of the Act. The section is amended to allow the Minister of National Revenue to provide electronic notices to persons under certain circumstances. Other provisions of the Act, where applicable, are amended concurrently to replace the verb "to mail" with the verb "to send". This applies, for example, to the notice of assessment in respect of a tax debt sent by the Minister under provisions governing the limitation period. However, those provisions of the Act that specifically require notices to be served personally or by registered or certified mail are not being amended to provide for the electronic communication of notices.

The amendments to section 301 come into force on Royal Assent.

Subsection 301(9) - Mailing and sending date

Subsection 301(9) currently provides that the date of mailing of any notice or demand that the Minister of National Revenue is required or authorized under the Act to send or mail to a person is deemed to be the date of the notice or demand.

Subsection 301(9) is amended to add that the day of sending of a notice or demand electronically is deemed to be the date of the notice or demand. This is consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances. The amended wording of subsection (9) also clarifies that the concept of "send" includes to mail.

Subsection 301(9.1) - Date when electronic notice sent

New subsection 301(9.1) is added to allow for the electronic communication of notices under the Act that can currently be sent by the Minister of National Revenue by ordinary mail.

Although for security reasons a notice of assessment is not itself to be conveyed electronically to a person, new subsection 301(9.1) provides that a notice or other communication will be, for the purposes of the Act, deemed to be sent by the Minister and received by a person on the date that an electronic message (informing the person that a notice or other communication is available in their secure electronic account) is sent to the person's most recent electronic address. A notice or other communication is considered to be made available if it is posted by the Minister in the person's secure electronic account, the person has authorized that notices or other communications may be made available in this manner and the person has not revoked their authorization in a manner specified by the Minister.

Subsection 301(10) - Date when assessment made

Subsection 301(10) currently provides that a notice of assessment sent by the Minister of National Revenue to a person is deemed to have been made on the day of mailing the notice of assessment.

Subsection 301(10) is amended to replace the term "mailing" with the term "sending", consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances.

Excise Tax Act

Clause 177

Associated persons

ETA
2(2.3) to (2.6)

New rules with respect to associated persons are introduced for the purposes of determining whether a person is entitled to file returns on a fiscal half-year basis rather than on a monthly basis. Eligibility for filing based on a fiscal half-year is determined by reference to the total of all taxes payable under Part III by the person and any person associated with the person in the current or previous fiscal year.

Subsection 2(2.3) provides that a particular corporation is associated with another corporation for the purposes of the Excise Tax Act if they are considered to be associated pursuant to subsections 256(1) to (6) of the Income Tax Act.

Subsection 2(2.4) provides that a person (other than a corporation) is associated with a particular corporation if that person or a group of associated persons of which the person is a member controls the corporation.

Subsection 2(2.5) sets out the circumstances in which a person will be treated as being associated with a partnership and with a trust.

Subsection 2(2.6) states that a person is associated with another person if both persons are associated with a third person.

The amendments come into force on Royal Assent.

Clause 178

Definitions

ETA
58.1(1)

Subsection 58.1(1) of the Excise Tax Act defines terms that apply for the purposes of Part VII of the Act.

Definitions

ETA
58.1(1)

"fiscal half-year"

The Act is amended to add a new definition, "fiscal half-year". The new definition is relevant for the purposes of new subsection 78(1.1) of the Act, which introduces rules for the determination of a new reporting period of a fiscal half-year of a person, and new subsection 78.1(2), which provides that the Minister of National Revenue may authorize a person, under certain conditions, to have a reporting period of a fiscal-half year.

"Fiscal half-year" means a fiscal half-year as determined under subsection 78(1.1).

"fiscal year"

The Act is amended to add a new definition, "fiscal year". The new definition is relevant for the purposes of new subsection 78(1.1) of the Act, which introduces rules for the determination of a new reporting period of a fiscal half-year of a person, and new subsection 78.1(2), which provides that the Minister of National Revenue may authorize a person, under certain conditions, to have a reporting period of a fiscal-half year.

"Fiscal year" of a person means the same period that is the person's fiscal year under Part IX of the Act.

"reporting period"

The Act is amended to add a new definition, "reporting period". The new definition is introduced in conjunction with new subsection 78.1(1), which provides that the reporting period of a person is a fiscal month unless the person meets conditions set out in new subsection 78.1(2) and is authorized by the Minister to have a reporting period of a fiscal half-year.

"Reporting period" means a reporting period as determined under new section 78.1.

The amendments come into force on Royal Assent.

Clause 179

Determination of fiscal half-years

ETA
78

Section 78 currently provides rules for the determination of a fiscal month of a person. New subsection 78(1.1) is introduced to set out rules for the determination of a new fiscal half-year reporting period.

New subsection 78(1.1) provides that the fiscal half-years of a person are 1) the period beginning on the first day in a fiscal year of the person and ending on the earlier of the last day of the sixth fiscal month and the last day in the fiscal year, and 2) the period, if any, beginning on the first day of the seventh fiscal month and ending on the last day in the fiscal year.

The amendment comes into force on Royal Assent.

Clause 180

Reporting periods

ETA
78.1

New section 78.1 determines the reporting period of a person for filing a return under this Act, consequential to the introduction of a new reporting period of a fiscal half-year of a person.

New subsection 78.1(1) provides that the reporting period of a person is a fiscal month.

New subsection 78.1(2) provides that, despite new subsection 78.1(1), the Minister of National Revenue may authorize a person to have a reporting period of a fiscal half-year, subject to certain conditions. For example, the total of all taxes payable under Part III by the person and any person associated with the person shall not exceed $120,000 in the current or previous fiscal year.

New subsection 78.1(3) provides that an authorization under new subsection (2) is deemed to be revoked if the total of all taxes payable under Part III by a person and any person associated with the person exceeds $120,000 in a fiscal year. The revocation is effective as of the first day after the end of the fiscal half-year in which the excess occurs.

New subsection 78.1(4) enables the Minister to revoke an authorization in specific circumstances, such as when a person, in writing, requests the Minister to do so.

New subsection 78.1(5) provides that, upon the revocation of an authorization under subsection (4), the Minister shall send a notice in writing and shall specify the fiscal month for which the revocation becomes effective.

New subsection 78.1(6) provides that, if a revocation under subsection (4) becomes effective before the last day of a fiscal half-year of a person that is authorized under new subsection (2), the period beginning on the first day of the fiscal half-year and ending immediately before the first day of the fiscal month for which the revocation becomes effective is deemed to be a reporting period of the person.

The amendments come into force on Royal Assent.

Clause 181

Returns and payments

ETA
79(1) to (3)

Subsection 79(1) currently requires persons who are required to pay tax under Part III of the Act, and every person who holds a licence granted under or in respect of that Part, to file monthly returns and calculate and remit any tax payable. The return for each of a person's fiscal months must be filed, and the tax, if any, remitted by the end of the first month following the fiscal month. Subsections 79(2) and (3) provide the Minister with the authority to extend the reporting period of a person under certain conditions, such as where the tax payable by the person for the preceding twelve fiscal months did not exceed $4,800, and sets out the deadline for the filing of a return for extended reporting periods.

Subsections 79(2) and (3) are repealed and subsection 79(1) is amended by replacing the terms "fiscal month" and "month" with the terms "reporting period" and "period" respectively, consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 78.1(2).

The amendments come into force on Royal Assent.

Clause 182

Limitation period

ETA
82(2.2)(a)(i) and (ii)

Subsection 82(2.2) of the Act generally specifies the limitation period for the collection of a tax debt by a person under this Act other than Part IX (i.e. GST) to be 10 years after the earliest day that the Minister of National Revenue can commence an action to collect the tax debt or, if a notice of assessment is mailed to or served on a person, the last day on which one of those notices is mailed or served.

Subparagraphs 82(2.2)(a)(i) and (ii) are amended to replace the term "mailed" with the term "sent", consequential to new provisions in this Act that allow the Minister to provide electronic notices to persons in certain circumstances. For further details on the authority of the Minister to provide electronic notices in respect of a tax debt payable by a person under this Act other than Part IX, refer to the commentary for new subsection 106.1(3.1).

The amendment comes into force on Royal Assent.

Clause 183

Failure to file a return when required

ETA
95.1

Section 95.1 imposes a penalty where a person fails to file a return for a fiscal month as and when required under subsection 79(1).

This section is amended by replacing the term "fiscal month" with the term "reporting period", consequential to the introduction of a new reporting period of a fiscal half-year of a person under new subsection 78.1(2).

The amendment comes into force on Royal Assent.

Clause 184

Presumption

ETA
106.1

Section 106.1 of the Act currently provides a number of evidentiary rules dealing with the administration and enforcement of the Act other than Part IX. The section is amended to allow the Minister of National Revenue to provide electronic notices to persons under certain circumstances. Other provisions of the Act other than Part IX, where applicable, are amended concurrently to replace the verb "to mail" with the verb "to send". This applies, for example, to the notice of assessment in respect of a tax debt payable by a person under this Act other than Part IX under provisions governing the limitation period. However, those provisions of the Act that specifically require notices to be served personally or by registered or certified mail are not being amended to provide for the electronic communication of notices.

The amendments to section 106.1 come into force on Royal Assent.

Mailing or sending date

Subsection 106.1(2)

Subsection 106.1(2) currently provides that the day of sending of certain notices that are sent by mail shall, in the absence of any evidence to the contrary, be deemed to have been sent on the day appearing from the notice.

Subsection 106.1(2) is amended to provide for the sending of certain notices to a person either by mail or by electronic notice, consequential to new provisions in the Act other than Part IX that allow the Minister of National Revenue to provide electronic notices to persons in certain circumstances. The amended subsection provides that if a certain notice is sent to a person either by mail or by electronic notice (as the case may be), the notice is deemed to have been sent on the day appearing from the notice.

Date when electronic notice sent

Subsection 106.1(3.1)

New subsection 106.1(3.1) is added to allow for the electronic communication of notices under the Act other than Part IX that can currently be sent by the Minister of National Revenue by ordinary mail.

Although for security reasons a notice of assessment is not itself to be conveyed electronically to a person, new subsection 106.1(3.1) provides that a notice or other communication will be, for the purposes of the Act other than Part IX, deemed to be sent by the Minister and received by a person on the date that an electronic message (informing the person that a notice or other communication is available in their secure electronic account) is sent to the person's most recent electronic address. A notice or other communication is considered to be made available if it is posted by the Minister in the person's secure electronic account, the person has authorized that notices or other communications may be made available in this manner and the person has not revoked their authorization in a manner specified by the Minister.

Clause 185

Request for Adjustments

ETA
274(6)

Where the general anti-avoidance rule under subsection 274(2) of the Act applies with respect to a transaction and a person has received a notice of assessment, reassessment or additional assessment, as the case may be, regarding the transaction, any other person is entitled to request an assessment, reassessment or additional assessment under subsection 274(6), in respect of the same transaction. The request under this subsection must be made within 180 days of the date of mailing of the first notice of assessment, reassessment or additional assessment.

Subsection 274(6) is amended to replace the term "mailing" with the term "sending", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to persons in certain circumstances. For further details on the authority of the Minister to provide electronic notices under Part IX, refer to the commentary for new subsection 335(10.1).

The amendment comes into force on Royal Assent.

Clause 186

Request for Adjustments

ETA
274.2(4)

Where the anti-avoidance rule under subsection 274.2(2) of the Act applies with respect to a transaction and a person has received a notice of assessment, reassessment or additional assessment, as the case may be, regarding the transaction, any other person is entitled to request an assessment, reassessment or additional assessment under subsection 274.2(4), in respect of the same transaction. The request under this subsection must be made within 180 days after the day on which the first notice of assessment, reassessment or additional assessment was mailed.

Subsection 274.2(4) is amended to replace the term "mailed" with the term "sent", consequential to new provisions in the Act that allow the Minister of National Revenue to provide electronic notices to persons in certain circumstances. For further details on the authority of the Minister to provide electronic notices under Part IX, refer to the commentary for new subsection 335(10.1).

The amendment comes into force on Royal Assent.

Clause 187

Limitation Period

ETA
313(2.2)(a)(i) and (ii)

Subsection 313(2.2) of the Act generally specifies the limitation period for the collection of a tax debt under Part IX to be 10 years after the earliest day that the Minister of National Revenue can commence an action to collect the tax debt or, if a notice of assessment or a notice for payment of amount under subsection 322(1) is mailed to or served on a person, the last day on which one of those notices is mailed or served.

Subparagraphs 313(2.2)(a)(i) and (ii) are amended to replace the term "mailed" with the term "sent", consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances. For further details on the authority of the Minister to provide electronic notices, refer to the commentary for new subsection 335(10.1).

The amendment comes into force on Royal Assent.

Clause 188

Payment of Remainder

ETA
315(2)

Section 315 of the Act currently provides that the Minister of National Revenue may not proceed to collection action under sections 316 to 321 in respect of any amount payable or remittable by a person that may be assessed under Part IX, other than interest, unless the amount has been assessed. Under subsection 315(2), where the Minister mails a notice of assessment, any amount assessed and unpaid is payable immediately to the Receiver General.

Subsection 315(2) is amended to replace the term "mails" with the term "sends", consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances. For further details on the authority of the Minister to provide electronic notices, refer to the commentary for new subsection 335(10.1).

The amendment comes into force on Royal Assent.

Clause 189

Evidence and Procedure

ETA
335

Section 335 of the Act provides a number of evidentiary and procedural rules dealing with the administration and enforcement of Part IX. The section is amended to allow the Minister of National Revenue to provide electronic notices to persons under certain circumstances. Other provisions under Part IX, where applicable, are amended concurrently to replace the verb "to mail" with the verb "to send". This applies, for example, to requests for adjustments after a notice of assessment has been sent by the Minister. However, those provisions of the Act that specifically require notices to be served personally or by registered or certified mail are not being amended to provide for the electronic communication of notices.

The amendments to section 335 come into force on Royal Assent.

Mailing or sending date

ETA
335(10)

Subsection 335(10) currently provides that the date of mailing of any notice or demand that the Minister of National Revenue is required or authorized under Part IX to send or mail to a person shall be deemed to be the date of the notice or demand.

Subsection 335(10) is amended to add that the day of sending of a notice or demand electronically shall be deemed to be the date of the notice or demand. This is consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances. The amended wording of subsection (10) also clarifies that the concept of "send" includes to mail.

Date when electronic notice sent

ETA
335(10.1)

New subsection 335(10.1) is added to allow for the electronic communication of notices under Part IX that can currently be sent by the Minister of National Revenue by ordinary mail.

Although for security reasons a notice of assessment is not itself to be conveyed electronically to a person, new subsection 335(10.1) provides that a notice or other communication will be, for the purposes of Part IX, deemed to be sent by the Minister and received by a person on the date that an electronic message (informing the person that a notice or other communication is available in their secure electronic account) is sent to the person's most recent electronic address. A notice or other communication is considered to be made available if it is posted by the Minister in the person's secure electronic account, the person has authorized that notices or other communications may be made available in this manner and the person has not revoked their authorization in a manner specified by the Minister.

Date when assessment made

ETA
335(11)

Subsection 335(11) currently provides that a notice of assessment sent by the Minister of National Revenue to a person shall be deemed to have been made on the day of mailing the notice of assessment.

Subsection 335(11) is amended to replace the term "mailing" with the term "sending", consequential to new provisions in the Act that allow the Minister to provide electronic notices to persons in certain circumstances.

Brewery Departmental Regulations

Clause 190

Time for making return

Brewery Departmental (Excise Act) Regulations
7

Section 7 of the Brewery Departmental Regulations currently provides that returns required by section 175 of the Excise Act shall be made monthly and contain certain information.

This section is amended consequential to the introduction of a new semi-annual reporting period for returns as provided for under new subsection 36.1(2) of the Act. In the case of a licensed brewer authorized to make returns for six-month periods, the return shall be made for each six-month period.

The amendment comes into force on Royal Assent.

Brewery Regulations

Clause 191

Excise duty payments

Brewery (Excise Act) Regulations
5

Currently, section 5 of the Brewery Regulations requires that the duty imposed under the Excise Act in respect of beer produced during a month shall be paid not later than the last day of the following month.

This section is amended consequential to the introduction of a new semi-annual reporting period for returns as provided for under new subsection 36.1(2) of the Act. In the case of a licensed brewer authorized to make returns for six-month periods, the duty imposed under the Act in respect of beer produced during a six-month period shall be paid not later than the last day of the month following that period.

The amendment comes into force on Royal Assent.

New Harmonized Value-added Tax System Regulations

Clause 192

Request for Adjustments

NHVATSR
37(4)

Existing subsection 37(4) of the New Harmonized Value-added Tax System Regulations (the Regulations) allows a person to request an assessment, reassessment or additional assessment in respect of a transaction where the anti-avoidance rule under subsection 37(2) of the Regulations applies with respect to the same transaction and for which another person has received a notice of assessment, reassessment or additional assessment, as the case may be. The request under subsection 37(4) of the Regulations must be made within 180 days of the date of mailing of the notice of assessment, reassessment or additional assessment to the other person.

Subsection 37(4) of the Regulations is amended to replace the term "mailing" with the term "sending", consequential to new provisions in the Excise Tax Act (the Act) that allow the Minister of National Revenue to provide electronic notices to persons in certain circumstances. For further details on the authority of the Minister to provide electronic notices under Part IX of the Act, refer to the commentary for new subsection 335(10.1) of the Act.

This amendment comes into force on Royal Assent.