Explanatory Notes to Legislative Proposals
Relating to the Income Tax Act and Regulations

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

December 2012

Preface

These explanatory notes are provided to assist in an understanding of legislative proposals relating to the Income Tax Act and Income Tax Regulations. These explanatory notes describe the 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 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 Legislative Proposals Section Amended Topic
Legislative Proposals Relating to Income Tax    
Income Tax Act    
1 11 Proprietor of business
2 13 Special rules – capital cost allowance
3 28 Farming or fishing business
4 34.1 Deemed December 31, 1995 income
5 34.2 Corporate partners
6 36 Railway companies
7 50 Debts established to be bad debts and shares of bankrupt corporation
8 53 Adjustments to cost base
9 55 Anti-avoidance – capital gains stripping
10 56 CPP/QPP and UCCB amounts for previous years
11 60 Refund of income payments
12 60.001 Support payments
13 60.1 Support payments
14 60.11 Support payments
15 66.1 Canadian exploration expense
16 67.1 Exemption for expenses for food, etc
17 87 Amalgamations
18 88 Winding-up
19 96 Members deemed carrying on business
20 111 Definitions
21 115 Non-resident employed as aircraft pilot
22 118.5 Inclusion of ancillary fees and charges
23 122.61 Canada child tax benefit – non-residents and part-year residents
24 122.64 Canada child tax benefit – communication of information
25 125 Specified partnership income
26 127 Deductions from Part I tax
27 127.1 Refundable investment tax credit
28 127.52 Adjusted taxable income determined
29 136 Cooperative corporations
30 137 Credit unions
31 142.2 Mark-to-market property
32 157 Payment by corporation
33 207.01 Taxes in respect of certain registered plans
34 207.04 Deemed disposition and reacquisition
35 207.05 Transitional prohibited investment benefit – filing rules
36 207.06 Waiver of taxes
37 207.061 TFSA income inclusion
38 207.07 Return and payment of tax
39 219 Branch tax
40 239 Disclosure of information
41 241 Disclosure of information
42 247 Exclusion – certain guarantees
43 248 Definitions
Income Tax Regulations    
44 ITR 806.2 Prescribed obligation
45 ITR 1100 Capital cost allowance – deductions allowed
46 ITR 1102 Railway companies
47 & 48 ITR Part XXX Communication of information
49 & 50 ITR 4900 Prescribed property
51 ITR Part L Excluded property
52 ITR 5600 Prescribed distributions
53 ITR 6500 Prescribed laws
54 ITR 8200.1 Prescribed energy conservation property
55 ITR 8900 Prescribed international organizations

Income Tax Act

Please note that these draft legislative proposals have been prepared taking into account draft legislative proposals previously released by the Department of Finance and legislation currently before Parliament.

Clause 1

Proprietor of business

ITA
11(1)

Subsection 11(1) of the Income Tax Act (the Act) provides that where an individual is a proprietor of a business, the individual’s income from the business for a taxation year is the individual’s income from the business for the fiscal periods of the business that end in the year. Subsection 11(1) is amended to delete the reference to former section 34.2, which concerns now repealed 10-year transitional relief rules in respect of changes to the definition “fiscal period”.

This amendment applies to taxation years that end after March 22, 2011.

Clause 2

Special rules – capital cost allowance

ITA
13

Section 13 of the Act provides a number of special rules relating to the treatment of depreciable property. Generally, these rules apply for the purposes of sections 13 and 20, and the capital cost allowance regime.

Ascertainment of certain property

ITA
13(18.1)

Subsection 13(18.1) of the Act provides that, in determining whether a particular property is prescribed energy conservation property, the Technical Guide to Class 43.1 (published by the Department of Natural Resources and as amended from time to time) applies conclusively with respect to engineering and scientific matters. Section 8200.1 of the Income Tax Regulations provides that “prescribed energy conservation property” means property described in Class 43.1 or 43.2 in Schedule II to the Income Tax Regulations. Department of Natural Resources is expected to soon publish a new guide, whose title would reflect its application to both Classes 43.1 and 43.2 in Schedule II. Therefore, subsection 13(18.1) is amended to refer to the Technical Guide to Class 43.1 and 43.2.

This amendment applies on and after the day the Technical Guide to Class 43.1 and 43.2 is first published by the Department of Natural Resources.

Clause 3

Farming or fishing business

ITA
28(1)(a)

Subsection 28(1) of the Act provides for a method of accounting, known as the cash-basis method, which may be used for computing income or loss from a business of farming or fishing. Paragraph 28(1)(a) is amended to delete the word “and”, which is unnecessary, at the end of the paragraph and to update its language.

This amendment comes into force on Royal Assent.

Clause 4

Deemed December 31, 1995 income

ITA
34.1(4) to (7)

Subsections 34.1(4) to (7) of the Act relate to transitional relief available to individuals in respect of the “December 31, 1995 income” from carrying on business as proprietors or partners in 1995. Subsections 34.1(4) to (7) are repealed as a consequence of the expiry of the transitional relief associated with an individual’s “December 31, 1995 income”.

This amendment comes into force on Royal Assent.

Clause 5

Corporate partners

ITA
34.2

Section 34.2 of the Act provides rules that adjust a corporate partner’s income to limit the deferral of tax where the partnership has a fiscal period that differs from the corporation’s taxation year.

Section 34.2 is amended in three respects, which are described below.

Character of amounts

ITA
34.2(5)(b)

Subsection 34.2(5) of the Act provides rules for characterizing the nature of the income that makes up a corporate partner’s adjusted stub period accrual for the purposes of the corporate partner income adjustment rules. Paragraph 34.2(5)(b) deems a corporation to have realized at the end of a taxation year an allowable capital loss in certain circumstances. The deemed allowable capital loss is, in general, equal to the amount by which the amount deductible under subsection 34.2(4) that is related to a prior year deemed taxable capital gain exceeds the actual taxable capital gains allocated to the corporation by the partnership for the year. The calculation of this allowable capital loss for a taxation year is made with the formula A – (B – C) where

A is the amount deductible by the corporation under subsection 34.2(4) for the year in respect of taxable capital gains of a partnership. This amount is the amount of the corporation’s adjusted stub period accrual in respect of the partnership that is characterized to be taxable capital gains in the prior taxation year and deductible under subsection 34.2(4) in the year.

B is the amount that is the total of

(i) all taxable capital gains allocated by the partnership to the corporation for the year;

(ii) the amount included in the corporation’s income under subsection 34.2(2) for the year in respect of taxable capital gains of the partnership. This amount is the portion of the corporation’s adjusted stub period accrual in respect of the partnership that is characterized to be taxable capital gains for the year; and

(iii) the amount included in the corporation’s income under subsection 34.2(12) for the year in respect of taxable capital gains of the partnership. This amount is the portion of the corporation’s reserve in respect of qualifying transitional income in respect of the partnership deducted in the prior taxation year and that is characterized to be taxable capital gains.

C is the amount, if any, that is the lesser of

(i) the amount that is the total of all allowable capital losses allocated by the partnership to the corporation for the year; and

(ii) all taxable capital gains allocated by the partnership to the corporation for the year.

Subparagraph (iii) of the description B is amended to ensure that the portion of the amount referred to in subsection 34.2(12) that is taxable capital gains in respect of the partnership is reduced by the amount, if any, deducted for the year by the corporation as a reserve under subsection 34.2(11) in respect of taxable capital gains of the partnership. In general terms, the amount determined under subparagraph (iii) of the description B is equal to the amount of taxable capital gains included in the corporation’s income for the year under subsection 34.2(12) in respect of the partnership less the portion of the corporation’s reserve under subsection 34.2(11) for the year in respect of qualifying transitional income in respect of that partnership that is characterized to be taxable capital gains.

This amendment applies to taxation years that end after March 22, 2011.

Transitional reserve

ITA
34.2(11)(c)

Subsection 34.2(11) of the Act sets out the deduction that a corporation may claim as a transitional reserve, consequential on the enactment in 2011 of the corporate partnership deferral rules in subsections 34.2(1) to (10). In any particular taxation year, a corporation that has qualifying transitional income (QTI) in respect of a partnership may deduct, as a reserve, under subsection 34.2(11) an amount not exceeding the least of three amounts.

Paragraph 34.2(11)(c) provides, in general, that a corporation’s deduction under subsection 34.2(11) for a taxation year cannot exceed the corporation’s income before deducting any amount under subsection 34.2(11) in respect of the partnership or under sections 61.3 and 61.4. In effect, paragraph 34.2(11)(c) limits a corporation’s maximum reserve for QTI in a year to no more than the corporation’s income for the year computed before claiming the reserve. The reference in paragraph 34.2(11)(c) to computing income does not refer to amounts that are only deductible in respect of computing a corporation’s “taxable income” as distinguished from its income. Paragraph 34.2(11)(c) is amended to ensure that a corporation’s income is also reduced by dividends received by the corporation on or after Announcement Date that are deductible under section 112 or 113 in computing the corporation’s taxable income.

This amendment applies to taxation years that end on or after Announcement Date.

Adjustment of qualifying transitional income

ITA
34.2(17)(b)

Subsection 34.2(11) of the Act provides two rules that apply to adjust the amount of a corporation’s adjusted stub period accrual that is included in the corporation’s qualifying transitional income (QTI) in respect of a particular partnership. This adjustment occurs only once, and in the “particular taxation year” identified by subsection 34.2(16). Once the adjustment to a corporation’s QTI in respect of a particular partnership is made, that QTI, as adjusted, is the corporation’s QTI in respect of the partnership for the particular taxation year and each subsequent taxation year.

In general, although a corporation’s adjusted stub period accrual initially included in its QTI in respect of a partnership is calculated based on the fiscal period(s) of the partnership that ended in the corporation’s first taxation year ending after March 22, 2011, the rules in subsection 34.2(17) refer to the “particular period” of the partnership. The particular period of the partnership is its fiscal period that begins in the corporation’s first taxation year for which the QTI was initially calculated and ends in the corporation’s taxation year (i.e., the particular taxation year).

Once the particular period of the partnership ends in the particular taxation year of the corporation, the corporation is allocated its share of the partnership’s income or loss for the particular period. Therefore, the corporation knows the actual portion of that income (loss) that should be the corporation’s adjusted stub period accrual included in its QTI. The corporation’s QTI may increase or decrease, depending on the particular case.

No adjustment of QTI occurs if it includes only “eligible alignment income” because such income is not subject to a similar adjustment.

Paragraph 34.2(17)(b) provides a read-as rule for the formula in subparagraph (b)(ii) of the definition “adjusted stub period accrual” in subsection 34.2(1), which applies in the case of certain multi-tier alignments of the fiscal periods of tiered partnerships. Although the read-as formula in paragraph 34.2(17)(b) is meant to adjust a corporation’s QTI so that it is not over or understated, the description of C in the read-as formula currently requires a reduction of a corporation’s “adjusted stub period accrual” in its QTI equal to the corporation’s eligible alignment income for the eligible fiscal period. This reduction is appropriate in year one, when a corporation’s QTI in respect of a partnership is being estimated, but is inappropriate under the read-as formula when “truing-up” the portion of a corporation’s QTI in year two that concerns its adjusted stub period accrual for the particular period of the partnership. Accordingly, the description of C in the formula in paragraph 34.2(17)(b) is amended to be Nil.

This amendment applies to taxation years that end after March 22, 2011.

Clause 6

Railway companies

ITA
36

Section 36 of the Act generally provides that an expenditure that is made by a railway company in respect of the repair, replacement, alteration or renovation of a depreciable property and that is required by the National Transportation Agency to be capitalized for regulatory rate-setting purposes must also be capitalized for income tax purposes (i.e., the railway company is deemed to have acquired a depreciable property).

Section 36 is repealed. As a result, these expenditures will now be subject to the same income tax rules and principles as when they are incurred by other taxpayers.

This repeal applies to expenditures incurred in taxation years that begin after Announcement Date.

Clause 7

Debts established to be bad debts and shares of bankrupt corporation

ITA
50(1)(b)(i)

Paragraph 50(1)(b) of the Act treats a taxpayer as having disposed of a share of the capital stock of a corporation owned at the end of the year in which the taxpayer becomes bankrupt (under the Bankruptcy and Insolvency Act) or insolvent (under the Winding-up and Restructuring Act) and as having reacquired the share at a nil cost immediately thereafter.

Subparagraph 50(1)(b)(i) is amended to remove a reference to subsection 128(3) as the definition “bankrupt” is now in subsection 248(1).

This amendment comes into force on Announcement Date.

Clause 8

Adjustments to cost base

ITA
53(1)(e)(i)(A)

Paragraph 53(1)(e) of the Act provides for additions to the adjusted cost base of a taxpayer’s partnership interest. Clause 53(1)(e)(i)(A) is amended to add a reference to paragraph 38(a.3). This amendment provides that the adjusted cost base of a partnership interest is to be calculated without reference to paragraph 38(a.3) and ensures that the non-taxable portion of the gain from an exchange, under paragraph 38(a.3), of an interest in a partnership for a publicly traded security is properly added to the adjusted cost base under paragraph 53(1)(e).

This amendment applies in respect of gifts made after February 25, 2008.

ITA
53(1)(r)

Paragraph 53(1)(r) of the Act increases the adjusted cost base of a taxpayer’s interest in, or share of the capital stock of, a flow-through entity disposed of by the taxpayer before 2005 that is described in any of paragraphs (a) to (f) of the definition “flow-through entity” in subsection 39.1(1). The adjusted cost base is increased by a pro-rata portion of the amount of the individual’s unused exempt gains balance in respect of the entity if the taxpayer disposes of all their interests in and shares of the capital stock of the entity.

Paragraph 53(1)(r) is amended to add a reference to an entity described in paragraph (h) of the definition “flow-through entity” in subsection 39.1(1). This permits the adjustment of the adjusted cost base of a taxpayer’s interest in a trust described in paragraph (h) of the definition (i.e., a trust created to hold shares of the capital stock of a corporation for the benefit of its employees).

This amendment applies to dispositions that occur after 2001.

Flow-through entity before 2005

ITA
53(1.2)

New subsection 53(1.2) of the Act provides that, for the purposes of the calculation in the formula in paragraph 53(1)(r), if the fair market value of all of a taxpayer’s interests in, or shares of, a flow-through entity described in that paragraph is nil at the time of their disposition, the fair market value of each interest or share in the entity is deemed to be $1. This amendment is necessary in order to permit a calculation to be made for the formula in paragraph 53(1)(r) where the fair market value of all taxpayer’s interests in the entity is nil at the time of disposition.

This amendment applies to dispositions that occur after 2001.

Clause 9

Anti-avoidance – capital gains stripping

ITA
55

In general terms, section 55 of the Act is an anti-avoidance provision directed against arrangements designed to use the inter-corporate dividend exemption to unduly reduce a capital gain on the disposition of shares. If the section applies, the dividend is treated as proceeds of disposition from the disposition of the shares (i.e., as a capital gain) and not as a dividend received by the corporation. Section 55 also includes two broad-based exemptions from its application. Paragraph 55(3)(a) provides an exemption for dividends received in certain “related” situations. Paragraph 55(3)(b) provides an exemption for dividends received in the course of certain corporate reorganizations commonly referred to as divisive or butterfly reorganizations.

Section 55 is amended to make a number of relieving changes that have been outlined in various comfort letters issued by the Department of Finance since October 2004. These changes address technical concerns regarding the application of section 55 in a manner consistent with the tax policy underlying the section. One change is also made to address a technical issue that has been brought to the attention of the Department of Finance.

Application of two exemptions

ITA
55(3)

Subsection 55(3) of the Act provides two exemptions from the anti-avoidance rule in subsection 55(2) that deems certain deemed dividends received in the course of a corporate reorganization to be a capital gain. Paragraph 55(3)(a) provides an exemption for dividends received in the course of certain related-party transactions. More specifically, paragraph 55(3)(a) exempts a dividend received by a corporation if, as part of a transaction or event or series of transactions or events that includes the receipt of the dividend, there was not a disposition of property or a significant increase in the total direct interest in a corporation described in subparagraphs 55(3)(a)(i) to (v).

Paragraph 55(3)(b) provides an exemption for dividends received in the course of certain corporate reorganizations commonly referred to as divisive or butterfly reorganizations. A butterfly reorganization involves a series of transactions whose objective is to distribute property of a distributing corporation pro rata among its corporate shareholders on a tax-deferred basis.

ITA
55(3)(a)(iii)(B)

Clause 55(3)(a)(iii)(B) of the Act describes a disposition, to a person or partnership that is unrelated to the dividend recipient, of property (other than shares of the dividend recipient) more than 10% of the fair market value of which is derived at any time during the series from shares of the capital stock of the dividend payer. In such a case, the exemption from the anti-avoidance rule in subsection 55(2) for certain related-party transactions does not apply. Clause 55(3)(a)(iii)(B) is amended to extend its application to property more than 10% of the fair market value of which is derived during the course of the series from “any combination of shares of the capital stock and debt” of the dividend payer.

ITA
55(3)(a)(iv)(B)

Clause 55(3)(a)(iv)(B) of the Act describes a disposition after the dividend is received, to a person or partnership that is unrelated to the dividend recipient, of property more than 10% of the fair market value of which is derived at any time during the course of the series from shares of the capital stock of the dividend recipient. In such a case, the exemption from the anti-avoidance rule in subsection 55(2) for certain related-party transactions does not apply. Clause 55(3)(a)(iv)(B) is amended to extend its application to property more than 10% of the fair market value of which is derived at any time during the course of the series from “any combination of shares or the capital stock and debt” of the dividend recipient.

These amendments apply in respect of dividends received on or after Announcement Date.

Interpretation for paragraph 55(3)(a)

ITA
55(3.01)

Paragraphs 55(3.01)(a) to (e) of the Act contain various interpretative rules for the purposes of the exemption from subsection 55(2) that is found in paragraph 55(3)(a) for certain related-party transactions. Subsection 55(3.01) is amended to add three interpretative rules consistent with comfort letters issued by the Department of Finance.

ITA
55(3.01)(f)

The first amendment relates to a Department of Finance comfort letter dated October 16, 2007 concerning subparagraph 55(3)(a)(ii), which provides an exemption from the application of subsection 55(2). This exemption does not apply if there is a significant increase in the total direct interest in any corporation held by one or more persons or partnerships who are unrelated persons.

In general terms, new paragraph 55(3.01)(f) provides that the exemption provided by subparagraph 55(3)(a)(ii) will apply if there is a significant increase in the total direct interest in a corporation that results from the issuance of shares of the capital stock of the corporation solely for money, provided that the shares are redeemed, acquired or cancelled by the corporation before the dividend is received. The issue that paragraph 55(3.01)(f) addresses is discussed in the following excerpt from a Department of Finance comfort letter dated October 16, 2007:

Parentco is a widely-held publicly-traded corporation. It owns indirectly, 100% of the shares of Subco 1, a taxable Canadian corporation. A subsidiary corporation controlled by Parentco ("Acquireco") acquires all the issued and outstanding shares of another corporation ("Targetco") such that Targetco becomes a wholly-owned subsidiary of Acquireco. Targetco controls another corporation ("Subco 2"). In consideration for the shares of Targetco, the Targetco shareholders receive money and shares of Parentco. Acquireco partly finances the cash portion of the takeover by issuing shares of its capital stock ("financing shares") solely for money to another corporation ("Finco") that is unrelated to Acquireco. Before the post-takeover internal reorganization (described below) is undertaken, the financing shares are redeemed, with the result that Finco no longer has an interest in Acquireco.

Following the acquisition of Targetco and after the cancellation of the financing shares, Parentco undertakes an internal reorganization that results in taxable dividends being received by Subco 1 and Subco 2. At no time before the end of the series of transactions or events that includes the receipt of the dividends will Subco 1 and Subco 2 cease to be controlled by Parentco.

Your concern is that subsection 55(2) of the Act will apply to the dividends that will be received in the course of the internal reorganization because the increase in interest in Acquireco by Finco will be described in subparagraph 55(3)(a)(ii) of the Act. You submit that the application of subsection 55(2) of the Act to the dividends to be received on the internal reorganization would not be appropriate since the increase in interest in Acquireco by Finco occurs as part of a financing transaction that is completed before the internal reorganization. Moreover, the transactions do not result in a tax-deferred disposition of the assets of the dividend payer or dividend recipient outside the Parentco group.

ITA
55(3.01)(g)

The second amendment relates to a Department of Finance comfort letter dated September 6, 2006 concerning subparagraphs 55(3)(a)(i) and (ii), which provide exemptions from subsection 55(2). Subparagraph 55(3)(a)(i) describes the disposition of property to an unrelated person or partnership, and subparagraph 55(3)(a)(ii) describes a significant increase in the total direct interest of an unrelated person or partnership in a corporation.

In general terms, new paragraph 55(3.01)(g) provides that subsection 55(2) does not apply in certain circumstances where there is a disposition of property otherwise described in subparagraph 55(3)(a)(i) or where there is a significant increase in the total direct interest in a corporation otherwise described in subparagraph 55(3)(a)(ii). This paragraph applies where five conditions are met:

  • The dividend payer is related to the dividend recipient immediately before the dividend is received.
  • The dividend payer did not, as part of the series of transactions or events that includes the receipt of the dividend, cease to be related to the dividend recipient.
  • The disposition or increase occurred before the dividend was received.
  • The disposition or increase was the result of the disposition of shares to, or the acquisition of shares of, a particular corporation.
  • At the time the dividend was received, all the shares of the capital stock of the dividend recipient and the dividend payer were owned by the particular corporation, a corporation that controlled the particular corporation, a corporation controlled by the particular corporation or any combination of those corporations.

The issue that paragraph 55(3.01)(g) addresses is set out in the following excerpt from a Department of Finance comfort letter dated September 6, 2006:

The series of transactions or events in issue ("relevant series") includes the disposition of the shares of a publicly-traded corporation ("Targetco") to another publicly-traded corporation ("Acquireco") such that Targetco will become a wholly-owned subsidiary of Acquireco. Following the disposition of the Targetco shares to Acquireco, an indirect wholly-owned subsidiary of Targetco ("T Sub") will undertake an internal reorganization that will result in dividends being received by T Sub and another indirect wholly-owned subsidiary of Targetco (''Newco''). More specifically, the transactions or events that will occur as part of the relevant series are as follows:

(a) The Targetco shareholders will dispose of their shares of Targetco to Acquireco in consideration for shares of Acquireco. The disposition of the Targetco shares by the Targetco shareholders will occur for proceeds of disposition that are less than fair market value or will be deemed by paragraph 55(3.01)(e) of the Act to occur at less than fair market value.

(b) The parent of T Sub will transfer some of its shares of T Sub to Newco in consideration for shares of Newco. The fair market value of the transferred T Sub shares will be equal to the fair market value of the transferred assets referred to in paragraph (c).

(c) T Sub will transfer some of its assets to Newco in exchange for preferred shares of Newco with a fair market value and redemption value equal to the transferred assets. T Sub and Newco will jointly elect under subsection 85(1) to effect the transfer on a tax-deferred basis.

(d) Newco will redeem the Newco preferred shares for a promissory note and T Sub will purchase for cancellation the shares of its capital stock owned by Newco for a promissory note. The promissory notes will be offset and cancelled. The redemption of the Newco preferred shares and the cancellation of the T Sub shares would result in deemed dividends being received by T Sub and Newco. Newco and T Sub will each be a taxable Canadian corporation and, as a result, the deemed dividends will be deductible to T Sub and Newco under subsection 112(1) of the Act.

(e) The parent of T Sub will transfer the shares of T Sub to an indirect wholly-owned subsidiary of Acquireco ("A Sub") for fair market value. T Sub will be wound up into A Sub under subsection 88(1). Pursuant to paragraph 55(3.01)(c) of the Act, A Sub will be deemed, for the purpose of paragraph 55(3)(a), to be the same corporation and a continuation of T Sub.

You advised us that, at no time before the end of the relevant series, will more than 10% of the fair market value of the Acquireco shares or the Targetco shares be derived from the shares of either Newco, T Sub or A Sub. In addition, T Sub and Newco will not cease to be related as part of the relevant series.

Your concern is that subsection 55(2) of the Act will apply to the dividends that will be received by T Sub and Newco in the course of the internal reorganization because

(a) the disposition of the Targetco shares to Acquireco is described in subparagraph 55(3)(a)(i); and

(b) the increase in interest in Acquireco by the Targetco shareholders is described in subparagraph 55(3)(a)(ii).

ITA
55(3.01)(h)

The third amendment concerns paragraphs 55(3.01)(b) and (c). Paragraphs 55(3.01)(b) and (c) deem an amalgamated corporation, or a parent corporation of a subsidiary that is wound up under subsection 88(1) into the parent corporation, to be the same corporation and a continuation of each predecessor corporation to the amalgamation or the subsidiary corporation, respectively. These paragraphs are relevant for the purposes of the exemptions from the application of subsection 55(2) that are provided under subparagraphs 55(3)(a)(ii) and (v). These exemptions are applicable if there is not a significant increase in the total direct interest in any corporation, or in the total of all direct interests in a dividend payer, by unrelated persons.

New paragraph 55(3.01)(h) provides that a winding-up of a subsidiary wholly-owned corporation to which subsection 88(1) applies, or an amalgamation under subsection 87(11) of a corporation with one or more subsidiary wholly-owned corporations, is deemed not to result in a significant increase in the total direct interest, or in the total of all direct interests, in the subsidiary or subsidiaries. This amendment relates to a Department of Finance comfort letter dated April 21, 2005. The issue addressed is that the shareholder could, as a result of an amalgamation or winding-up, have a significant increase in the shareholder’s total direct interest in the continued corporation solely because the shareholder’s interest (which did not change in economic terms) went from being an indirect interest to being a direct interest on the amalgamation or winding-up.

The three amendments to subsection 55(3.01) apply in respect of dividends received after 2003.

Paragraph 55(3)(b) not applicable

ITA
55(3.1)

Subsection 55(3.1) of the Act sets out the circumstances in which a dividend received in the course of a butterfly reorganization to which paragraph 55(3)(b) applies is not excluded from the application of subsection 55(2). Specifically, a dividend will be denied the butterfly exemption where the conditions set out in any of paragraphs 55(3.1)(a) to (d) apply.

Subsection 55(3.1) is amended in three respects, consistent with Department of Finance comfort letters dated June 8, 2005 and November 26, 2004.

ITA
55(3.1)(a)

Paragraph 55(3.1)(a) of the Act provides that a dividend received in the course of a butterfly reorganization to which paragraph 55(3)(b) applies is not excluded from the application of subsection 55(2) if, in contemplation of and before a distribution made in the course of the reorganization in which the dividend is received, property became property of the distributing corporation, a corporation controlled by it, or of a predecessor corporation of any such corporation. This rule is subject to certain exceptions.

Paragraph 55(3.1)(a) is amended to provide that the paragraph does not apply to property acquired in contemplation of (and before) a reorganization described in paragraph 55(3)(b) by the distributing corporation if the distribution is made by a “specified corporation” as defined in subsection 55(1). In general terms, a specified corporation is a public corporation or a specified wholly-owned corporation of a public corporation, where certain conditions are met.

This amendment relates to a comfort letter dated November 26, 2004 issued by the Department of Finance. The issue that this amendment addresses is that the rules governing butterfly reorganizations mandate that each type of property owned by the distributing corporation (other than a distributing corporation that is a specified corporation) be distributed pro ratato each transferee corporation based on the transferee corporation’s proportionate interest in the distributing corporation. However, in the case of a specified corporation, subsection 55(3.02) permits the distributing corporation to undertake a butterfly reorganization by making a proportionate distribution of all its property as opposed to each type of property. As a consequence, the restrictions in paragraph 55(3.1)(a), which protect against the alteration of types of property in anticipation of a butterfly reorganization, should not apply if the distribution is a distribution of a specified corporation.

This amendment applies in respect of dividends received after 2003.

ITA
55(3.1)(c)

Paragraph 55(3.1)(c) of the Act denies the butterfly exemption for a dividend received by a transferee corporation in circumstances where, as part of the series of transactions or events that includes the receipt of the dividend, a significant portion of the property received by the transferee corporation on a distribution becomes property of a partnership or of a person who is not related to the transferee corporation. For this purpose, certain exceptions are provided, including under clause 55(3.1)(c)(i)(A), which refers to property acquired as a result of a disposition in the ordinary course of business.

Clause 55(3.1)(c)(i)(A) is amended to include property acquired before the distribution for consideration that consists solely of money or indebtedness that is not convertible into other property. The issue that this amendment addresses is set out in the following excerpt from a Department of Finance comfort letter dated June 8, 2005:

You advised us that a taxable Canadian corporation ("HoIdco") has two shareholders, both of which are taxable Canadian corporations ("Xco" and "Yco"). Xco and Yco own 2/3 and 1/3, respectively, of the common shares of Holdco. The principal asset owned by Holdco is shares of a public corporation ("Pubco").

HoIdco is proposing to implement a reorganization described in paragraph 55(3)(b) of the Act (i.e., a "butterfly reorganization"). Prior to the distribution that will occur in the course of the butterfly reorganization, Holdco intends to dispose of 1/3 of its Pubco shares either directly through the stock exchange or indirectly by disposing of the shares of a wholly-owned subsidiary corporation to which Holdco will transfer the Pubco shares. In each case, the shares will be disposed of at fair market value for consideration that consists only of money.

Your concern is that property described in clauses 55(3.1)(c)(ii)(B) and 55(3.1)(d)(ii)(B) will be acquired as a result of the proposed disposition of the shares of Pubco. You submit that the result is anomalous and frustrates the legislative scheme in paragraphs 55(3.1)(c) and (d), particularly in view of the exclusion in clause 55(3.1)(a)(iv)(C) for property disposed of for proceeds that consist only of money or indebtedness that is not convertible into other property.

This amendment applies in respect of dividends received after 2003.

ITA
55(3.1)(d)

Paragraph 55(3.1)(d) of the Act denies the butterfly exemption for a dividend received by the distributing corporation in circumstances where, as part of the series of transactions or events that includes the receipt of the dividend, a significant portion of the property owned by the distributing corporation immediately before it made a distribution and not disposed of by it on the distribution is acquired by a partnership or a person who is not related to the distributing corporation.

For this purpose, certain exceptions are provided, including under clause 55(3.1)(d)(i)(A), which refers to property acquired as a result of a disposition in the ordinary course of business. Clause 55(3.1)(d)(i)(A) is amended to include property acquired before the distribution for consideration that consists solely of money or indebtedness that is not convertible into other property. This amendment concerns the comfort letter dated June 8, 2005 discussed above. For further information, see the commentary on paragraph 55(3.1)(c).

This amendment applies in respect of dividends received after 2003.

Clause 10

CPP/QPP and UCCB amounts for previous years

ITA
56(8)

Subsection 56(8) of the Act allows an individual to exclude from income for the taxation year of receipt certain CPP/QPP disability benefits and benefits received under the Universal Child Care Benefit Act that relate to one or more prior years (except where the prior year benefits are less than $300) and to pay tax on those benefits as if they had been received in the years to which they relate. The payment of tax on this basis is provided for in section 120.3.

Subsection 56(6) provides that, in certain circumstances, Universal Child Care Benefits are to be included in the income of an individual other than the recipient (i.e., the recipient’s cohabiting spouse or common-law partner). Subsection 56(8) is amended so that it also applies to such an individual.

This amendment applies to the 2006 and subsequent taxation years.

Clause 11

Refund of income payments

ITA
60(q)

Paragraph 60(q) of the Act provides a deduction for any amount repaid by a taxpayer on account of a scholarship, fellowship, bursary, research grant or prize for achievement that was included in computing the taxpayer’s income for a previous year.

Subparagraph 60(q)(i) is amended to also allow a deduction where the corresponding inclusion is in the taxpayer’s income for the current year.

This amendment comes into force on March 1, 1994.

Clause 12

Support payments

ITA
60.001

Section 60.001 of the Act is a rule of application for former paragraph 60(c.1), which provided for the deductibility of certain support payments payable pursuant to orders made by a competent tribunal in accordance with the laws of a province. Section 60.001 is irrelevant in respect of orders made after 1992 as a result of the amendment of paragraph 60(c.1) by S.C. 1994, c. 7.

The repeal of section 60.001 applies to orders made after Royal Assent.

Clause 13

Support payments

ITA
60.1(1)

Subsection 60.1(1) of the Act provides that for the purposes of paragraph 60(b) and subsection 118(5), if an order or agreement provides for the payment of an amount by the taxpayer to or for the benefit of a person or children in the person’s custody, the amount when payable is deemed to be payable to and receivable by the person and the amount when paid is deemed to be paid to and received by the person.

Paragraph 60(b) provides for the deduction of certain support amounts paid by a taxpayer to a person while the taxpayer and the person are living separate and apart. The deduction provided by paragraph 60(b) parallels paragraph 56(1)(b).

The French version of subsection 60.1(1) is amended to correct the reference to paragraph 60(b) and to clarify the circumstances in which the subsection applies.

This amendment comes into force on Royal Assent.

Clause 14

Support payments

ITA
60.11

Section 60.11 of the Act is a rule of application for former subparagraph 60.1(1)(a)(ii), which in turn applied for the purposes of the deduction of support payments under paragraph 60(b). Section 60.11 is irrelevant in respect of amounts paid under a decree, order or judgment made by a competent tribunal after 1992, or under a written agreement entered into after 1992, as a result of the amendment of subsection 60.1(1) by S.C. 1994, c. 7.

The repeal of section 60.11 comes into force on Royal Assent.

Clause 15

Canadian exploration expense

ITA
66.1

Section 66.1 of the Act provides rules relating to the deduction of “Canadian exploration expense” (CEE), defined in subsection 66.1(6). Specifically, the deduction of CEE is provided for through the concept of “cumulative Canadian exploration expense” (as defined in subsection 66.1(6)) and deductions under subsections 66.1(2) and (3) with respect to cumulative Canadian exploration expense.

Definitions

ITA
66.1(6)

Subsection 66.1(6) of the Act provides several definitions for the purposes of section 66.1, such as Canadian exploration expense, cumulative Canadian exploration expense, and Canadian renewable and conservation expense. Canadian exploration expense of a taxpayer includes any Canadian renewable and conservation expense incurred by the taxpayer.

“Canadian renewable and conservation expense”

The definition “Canadian renewable and conservation expense” has the meaning assigned by section 1219 of the Income Tax Regulations. In this regard, the Technical Guide to Canadian Renewable and Conservation Expenses (CRCE) published by the Department of Natural Resources applies conclusively with respect to engineering and scientific matters in the determination of whether an expense meets the criteria set out in section 1219 of the Income Tax Regulations.

The definition is amended to clarify that in respect of a prescribed energy conservation property the Technical Guide to Canadian Renewable and Conservation Expenses (CRCE) applies only to establish criteria as to whether or not expenses are CRCE.

This amendment comes into force on Announcement Date.

Clause 16

Exemption for expenses for food, etc.

ITA
67.1(2)

Subsection 67.1(1) of the Act provides a general limitation on the amount that may be deducted in respect of the human consumption of food or beverages or the enjoyment of entertainment, limiting an otherwise deductible amount to 50% of the expense. Subparagraph 67.1(2)(e)(iii) provides that meal and entertainment expenses are exempt from the application of subsection 67.1(1) if they are paid or payable in respect of the taxpayer’s duties performed at a special work site in Canada that is at least 30 kilometres from the nearest boundary of any urban area that has a population of at least 40,000 people. “Urban area” is defined by Statistics Canada in the Census Dictionary.

Subparagraph 67.1(2)(e)(iii) is amended to replace the term “urban area” with “population centre” as a result of the adoption by Statistics Canada of the term “population centre” in place of “urban area”.

This amendment applies to the 2013 and subsequent taxation years.

Clause 17

Amalgamations

ITA
87

Section 87 of the Act provides rules that apply where there has been an amalgamation of two or more taxable Canadian corporations to form a new corporation.

Rules – amalgamations

ITA
87(2)

Subsection 87(2) of the Act provides various rules that apply to various tax attributes where two or more taxable Canadian corporations amalgamate to form a new corporation.

Refundable investment tax credit and balance-due day

ITA
87(2)(oo.1)

Paragraph 87(2)(oo.1) of the Act applies for the purposes of the definition “qualifying corporation” in subsection 127.1(2) and for the one-month extension of the corporation's balance-due day under subparagraph (d)(i) of the definition “balance-due day” in subsection 248(1). The definition “qualifying corporation” is relevant for determining the eligibility for refundable investment tax credits under section 127.1 of a new corporation formed on an amalgamation.

Paragraph 87(2)(oo.1) provides that a new corporation’s taxable income for a specified previous taxation year is deemed to be the sum of its predecessor corporations’ taxable incomes for taxation years that end as a consequence of the amalgamation. The paragraph also provides a similar rule for the computation of the new corporation’s business limit for the specified previous taxation year. This specified previous taxation year is consistent with the taxation year specified under the definition “qualifying corporation” in subsection 127.1(2) and subparagraph (d)(i) of the definition “balance-due day” in subsection 248(1).

However, the qualifying income limit of a corporation is also relevant for the purposes of the definition “qualifying corporation” in subsection 127.1(2). Therefore, new subparagraph 87(2)(oo.1)(iv) is added to provide that a new corporation’s qualifying income limit for a specified previous taxation year is deemed to be the sum of its predecessor corporations’ qualifying income limits for taxation years that end as a consequence of the amalgamation.

Consistent with the application date of the definition “qualifying income limit” in subsection 127.1(2), this amendment applies to amalgamations that occur after February 25, 2008.

Clause 18

Winding-up

ITA
88

Section 88 of the Act deals with the tax consequences arising from the winding-up of a corporation.

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 corporation. These rules also apply in certain circumstances when a parent and a subsidiary are merged by way of an amalgamation to which subsection 87(11) applies.

Paragraphs 88(1)(c.2) to (c.4) are amended to give effect to certain Department of Finance comfort letters issued since 2001. These comfort letters indicated a willingness to recommend to the Minister of Finance certain technical changes to subsection 88(1) that are consistent with the tax policy underlying the subsection. In addition, a change is made in respect of the calculation in paragraph 88(1)(d) of the amount by which the parent may increase or “bump” the adjusted cost base (ACB) of certain capital property acquired by it on the winding-up of its subsidiary.

ITA
88(1)(c.2)(i)

Subparagraph 88(1)(c.2)(i) of the Act defines “specified person” as the parent corporation and each person related (other than because of paragraph 251(5)(b)) to the parent. The definition “specified person” is relevant for the purposes of paragraph 88(1)(c) in that a specified person may acquire property distributed to the parent on the winding-up of the subsidiary, or property substituted for such property, without engaging the bump denial rule in subparagraph 88(1)(c)(vi).

The definition “specified person” in subparagraph 88(1)(c.2)(i) is amended in three respects. First, the definition “specified person” is amended to include persons who would be related to the parent in two circumstances. In general terms, if an individual dies, the individual’s children will be considered to be related to:

  • the individual’s surviving brothers and sisters (i.e., their uncles and aunts); and
  • each child of a deceased brother or sister of the individual (i.e., certain first cousins).

The issue that this amendment addresses is set out in the following example:

Individual X, who was a resident of Canada, died owning all the shares of a taxable Canadian corporation (Xco). Each of X’s surviving children is entitled to an equal percentage interest in X’s Estate. However, one of X’s children (Z) predeceased X and, as a result, the share of X’s Estate that would have devolved to Z instead devolve upon trusts for the children of Z (i.e., trusts for the grandchildren of X through Z).

As a consequence of the death of X, the voting shares of Xco are acquired by a trust, the beneficiaries of which are the beneficiaries of X’s Estate. The trust and the Estate propose to transfer the remaining shares of Xco to a newly incorporated taxable Canadian corporation (Newco). The trust would take back voting shares of Newco and the Estate would take back non-voting shares. Newco and Xco would then enter into a vertical amalgamation as described in subsection 87(11) to create “Amalco”. On the amalgamation, the shares of Newco would be converted into shares of Amalco. The Estate would then distribute the non-voting shares of Amalco to the children of X and to the trusts for the grandchildren of X as provided under X’s Will.

However, the grandchildren of X through Z are not “specified persons” since they are not considered to be related to the surviving children of X (that is, to their uncles and aunts through X) for the purposes of the Act. Consequently, the grandchildren through Z cannot be considered to be part of the related group that would control Newco.

If more than one of X’s children predeceased X and X’s children had children, there would be cousins who would not be related to each other for the purposes of the Act and they would not be part of the related group that would control Newco. The amendment also addresses this possibility. However, the amendment does not accommodate the situation where at the time of X’s death shares were inherited by grandchildren in circumstances where their parents (the children of the deceased) were alive at the time of the death.

Second, the definition “specified person” in subparagraph 88(1)(c.2)(i) is amended to allow a person to be a specified person before the incorporation of the parent corporation (see new clause 88(1)(c.2)(i)(C)). The issue that this amendment addresses is set out in the following excerpt from a Department of Finance comfort letter dated February 23, 2007:

Prior to the incorporation of the parent corporation ("Parent"), a taxable Canadian corporation ("Grandparent") will acquire common shares of the subsidiary corporation ("Subco") from an arm’s length person. Grandparent will acquire sufficient common shares of Subco to become a specified shareholder of Subco but not enough to acquire control of Subco. To fund the acquisition of those Subco common shares, Grandparent will issue shares and debt to a corporation that is related to it ("Related Corporation"). Grandparent will then cause the Parent to be incorporated and, following the incorporation, Parent will acquire the remaining common shares of Subco from arm’s length persons, thereby acquiring control of Subco. Grandparent will transfer its Subco common shares to Parent such that, after the transfer, Subco is a wholly-owned subsidiary of Parent. As a final step, Parent would like to wind-up Subco and to increase (i.e., bump) the adjusted cost base of certain non-depreciable capital property of Subco to be acquired by it on the winding up as provided in paragraphs 88(1)(c) and (d) of the Act.

In the circumstances described above, the Related Corporation is a specified shareholder of Subco that will acquire substituted property (shares and debt of the Grandparent) as part of the series of transactions or events that includes the winding-up of Subco. Therefore, the bump denial rule in paragraph 88(1)(c)(vi) of the Act will apply unless the Related Corporation is considered to be a specified person. In this respect, you note that subparagraph 88(1)(c.2)(i) defines "specified person" at any time to mean the parent and each person related to the parent at that time. Accordingly, you are concerned that the Related Corporation may not be a specified person solely because, at the time it acquired the shares and debt of the Grandparent, Parent had not yet been incorporated.

Third, the definition “specified person” in paragraph 88(1)(c.2) is amended to place some of the text currently in subparagraph 88(1)(c.2)(i), which relates to an anti-avoidance rule, in new subparagraph 88(1)(c.2)(i.1) and by making changes consequential on the above mentioned amendments.

These amendments apply to windings-up that begin, and amalgamations that occur, after 2001.

ITA
88(1)(c.2)(iii)(A.1) and (A.2)

Subparagraph 88(1)(c.2)(iii) of the Act provides two rules that apply in determining if a person is a specified shareholder of a corporation for the purposes of paragraph 88(1)(c.2) and subparagraph 88(1)(c)(vi). The first of these rules is that a reference in the definition “specified shareholder” in subsection 248(1) to “the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation” is to be read as “the issued shares of any class (other than a specified class) of capital stock of the corporation or of any other corporation that is related to the corporation and that has a significant direct or indirect interest in any issued shares of the capital stock of the corporation”. The second rule deems a corporation not to be a specified shareholder of itself.

Subparagraph 88(1)(c.2)(iii) is amended to add two new rules. New clause 88(1)(c.2)(iii)(A.1) provides that a corporation controlled by another corporation is deemed not to own any shares of the capital stock of the other corporation if the corporation does not have a direct or indirect interest in any shares of the capital stock of the other corporation. The issue that this amendment addresses is set out in the following excerpt from a Department of Finance comfort letter dated August 13, 2007:

1. Vco is a taxable Canadian corporation that controls Target, another taxable Canadian corporation. Target owns all the shares of Subco and Sellco 1. Subco owns all the shares of Sellco 2.

2. Aco is a taxable Canadian corporation that deals at arm's length with Vco and Target.

3. Pco is a taxable Canadian corporation that is controlled by another corporation (Pco Holdings). Pco and Pco Holdings deal at arm's length with Vco, Target and Aco.

4. Aco incorporates a wholly-owned subsidiary (A sub) which acquires all the Target shares for cash.

 5. Target is wound up into (or amalgamated with) A sub with the view to increasing the tax cost of the shares of Subco and Sellco 1, as provided by paragraphs 88(1)(c) and (d) of the Act.

 6. Subco is then wound up into (or amalgamated with) A sub (or its successor) with a view to increasing the tax cost of the shares of Sellco 2, as provided by paragraphs 88(1)(c) and (d) of the Act.

7. Pco purchases the shares of Sellco 1 and Sellco 2 from A sub (or its successor) for cash.

Your concern is that subparagraph 88(1)(c)(vi) would preclude the increase in the cost of the shares of Subco and Sellco 1 on the winding-up (or amalgamation) of Target, as described in paragraph 5 above, and the increase in the cost of the shares of Sellco 2 on the winding-up (or amalgamation) of Subco, as described in paragraph 6 above.

Subparagraph 88(1)(c)(vi) operates to deny the increase in the cost of non-depreciable capital property distributed on the winding-up of a subsidiary if the distributed property or property substituted for the distributed property is acquired by a person or persons described in subclauses 88(1)(c)(vi)(B)(I) to (III). The purpose of the subparagraph is to deny that increase where one or more persons who had a significant interest in the subsidiary before the parent last acquired control of the subsidiary acquire a significant interest in the property, either directly or indirectly, as part of the series of transactions or events that includes the winding-up.

Your particular concern involves the inclusion in subclause 88(1)(c)(vi)(B)(III) of a corporation (other than a specified person or the subsidiary) of which a specified shareholder of the subsidiary is a specified shareholder. In your view, Pco would be a corporation described in this subclause in respect of the winding-up of Target and Subco because each of Sellco 1 and Sellco 2 will be a specified shareholder of Target and Subco prior to the acquisition of control of Target by Aco and will be a specified shareholder of Pco after Pco acquires the shares of Sellco 1 and Sellco 2. The reason that Sellco 1 and 2 will be specified shareholders of Target, Subco and Pco, is that each of Sellco 1 and Sellco 2 is deemed to own the shares of Target and Subco owned by Vco and, following the acquisition of the shares of Sellco 1 and Sellco 2 by Pco, each is deemed to own the shares of Pco owned by Pco Holdings (see, in this respect, paragraph (a) of the definition "specified shareholder" in subsection 248(1)).

You submit that the denial of the cost base increase in these circumstances is contrary to the policy underlying subparagraph 88(1)(c)(vi). This provision is not intended to deny the cost base increase where the purchaser (in this case, Pco) is not a person described in subclauses 88(1)(c)(vi)(B)(I) to (III) prior to the acquisition of control of the subsidiary. In this respect, you note that Pco only becomes a person described in subclause 88(1)(c)(vi)(B)(III) because of the acquisition of the shares of Sellco 1 and Sellco 2. In the absence of this acquisition, Pco would not be a person described in subclause 88(1)(c)(vi)(B)(III).

New subclause 88(1)(c.2)(iii)(A.2) provides that the definition “specified shareholder” in subsection 248(1) is to be read without reference to its paragraph (a) in respect of any share of the capital stock of the subsidiary that the person would, but for clause 88(1)(c.2)(iii)(A.2), be deemed to own solely because the person has a right described in paragraph 251(5)(b) to acquire shares of the capital stock of a corporation that

  • is controlled by the subsidiary referred to in subsection 88(1), and
  • does not have a direct or indirect interest in the subsidiary.

The issue that this amendment addresses is set out in the following excerpt from a Department of Finance comfort letter dated August 13, 2004:

Your concern relates to a series of proposed transactions wherein a taxable Canadian corporation ("Bidco") will acquire control of another taxable Canadian corporation ("Subco") followed by a winding up of Subco into Bidco. Prior to the acquisition of control, Holdco will own all of the shares of Subco and Subco will own all the shares of another corporation ("Sellco"). As a condition of the sale of the Subco shares by Holdco to Bidco, Holdco and Subco/Bidco will enter into an agreement to sell ("purchase agreement") the shares of Sellco to an arm’s length purchaser ("Pco"), which sale will occur shortly after the winding up of Subco. Prior to entering into the purchase agreement, Pco will not be a specified shareholder of Subco.

More specifically, you are concerned that the right to acquire the shares of Sellco under the purchase agreement would result in Pco being a specified shareholder of Subco, although Pco does not have, nor does it intend to acquire, any direct or indirect interest in the shares of Subco, Holdco or Bidco. Your concern relates to the application of the deeming rules in subsections 251(2), (3) and (5) combined with the definition of "specified shareholder" in subsection 248( 1) of the Act.

In the circumstances described above, paragraph 251(5)(b) of the Act would deem Pco, for the purpose of subsection 251(2), to be in the same position in relation to the control of Sellco as if it owned the shares of Sellco. As a result, Pco would be related to Sellco after entering into the purchase agreement. As Pco and Holdco would be related to the same corporation, they would be deemed by subsection 251(3) to be related to each other. Under the definition of “specified shareholder”, Pco would be treated as owning all the shares of Subco owned by Holdco and, therefore, would be a specified shareholder of Subco before control of Subco is acquired by Bidco. Since Pco would be a specified shareholder of Subco and, since Pco will acquire the shares of Sellco as part of the series of transactions that includes the winding up of Subco, Bidco would be precluded from obtaining a bump in the adjusted cost base of the shares of Sellco acquired on the winding up of Subco.

We agree that where a person has a right to acquire a share of a corporation (the "downstream corporation") controlled by another corporation (the ''upstream corporation") and the downstream corporation does not have a direct or indirect interest in any of the issued shares of the upstream corporation, the right should not, in and of itself, result in the person becoming a specified shareholder of the upstream corporation for the purpose of subparagraph 88(1)(c)(vi) of the Act. Accordingly, we are prepared to recommend to the Minister that paragraph 88(1)(c.2) of the Act be amended to exclude a right to acquire shares of a downstream corporation from being considered in determining if a person is a specified shareholder of the upstream corporation in circumstances where the downstream corporation does not have a direct or indirect interest in any of the issued shares of the upstream corporation.

These amendments apply to windings-up that begin, and amalgamations that occur, after 2001.

ITA
88(1)(c.2)(iv)

New subparagraph 88(1)(c.2)(iv) of the Act is introduced to provide that property distributed to the parent on a winding-up to which subsection 88(1) applies is deemed not to be acquired by a person if the person acquired the property before the acquisition of control referred to in clause 88(1)(c)(iv)(A) and the property is not owned by the person at any time after that acquisition of control. The issue that this amendment addresses is set out in the following excerpt from a Department of Finance comfort letter dated September 1, 2006:

Where subsection 88(1) of the Act applies, the parent corporation may elect to increase the cost of capital property (other than ineligible property) distributed on the winding-up within the limits set out in that subsection. Capital property will be ineligible property if, among other things, a person described in any of subclauses 88(1)(c)(vi)(B)(I) to (III) (a "restricted person") acquires, as part of the series of transactions or events that includes the winding-up, property distributed to the parent on the winding-up or property substituted for such property.

Your concern relates to a series of proposed transactions in which a restricted person will acquire property to be distributed to the parent on the winding up; however, the restricted person will not own the property at any time after the acquisition of control of the subsidiary. You note that subparagraph 88(1)(c.3)(iv) of the Act deems property not to be property substituted for the property distributed on the winding-up if it is not owned by a restricted person at any time after the acquisition of control of the subsidiary. However, there is no similar provision dealing with the acquisition of property distributed to the parent on the winding-up. Accordingly, the acquired property will be ineligible property.

We agree that ineligible property should not include property distributed to the parent on the winding-up of the subsidiary if a restricted person does not own the property at any time after the acquisition of control of the subsidiary.

This amendment applies to windings-up that begin, and amalgamations that occur, after 2001.

ITA
88(1)(c.3)(i)

Paragraph 88(1)(c.3) of the Act provides that substituted property includes property described in subparagraph 88(1)(c.3)(i) and (ii), but excludes property described in subparagraphs 88(1)(c.3)(iii) to (v). Substituted property is a concept used in subparagraph 88(1)(c)(vi), which describes certain property that is ineligible for the cost base increase (or bump) in paragraph 88(1)(c).

Subparagraph 88(1)(c.3)(i) provides that, for the purposes of clause 88(1)(c)(vi)(B), substituted property includes property (other than a specified property) owned by a person after the acquisition of control of the subsidiary where the fair market value of the property is wholly or partly attributable to property distributed to the parent on the winding-up. Subparagraph 88(1)(c.3)(i) is amended to limit its application to cases where more than 10% of the fair market value of the property owned by a person after the acquisition of control is attributable to the particular property or properties distributed to the parent on the winding-up.

This amendment is intended to permit the acquisition of property described in that subparagraph without denying the bump provided that not more than 10% of the fair market value of the acquired property is attributable to property distributed to the parent on the winding-up. The 10% threshold is meant to limit the type of property that is deemed to be substituted property and to simplify the application of the bump denial rule. In this respect, the addition of the 10% threshold reduces the need to create an exhaustive list of acceptable properties in the definition “specified property” in paragraph 88(1)(c.4).

This amendment applies to windings-up that begin, and amalgamations that occur, on or after Announcement Date.

ITA
88(1)(c.4)(ii)

Paragraph 88(1)(c.4) of the Act defines “specified property” for the purposes of subparagraphs 88(1)(c.3)(i) and (v). Specified property is not substituted property within the meaning of subparagraph 88(1)(c.3)(i). Subparagraph 88(1)(c.4)(ii) provides that an indebtedness that was issued by the parent as consideration for the acquisition of a share of the capital stock of the subsidiary by the parent is a specified property.

Subparagraph (c.4)(ii) is amended to apply to indebtedness issued by the parent for consideration that consists solely of money. This amendment applies to windings-up that begin, and amalgamations that occur, after 2001.

ITA
88(1)(c.4)(v) and (vi)

Subparagraphs 88(1)(c.4)(v) and (vi) of the Act describe certain types of property that are considered to be specified property for the purposes of paragraph 88(1)(c.4) and subparagraphs (c.3)(i) to (v). Specified property is excluded from the extended meaning of substituted property found in paragraph 88(1)(c.3).

Paragraph 88(1)(c.4) is further amended in three respects. First, subparagraphs 88(1)(c.4)(v) and (vi) are combined into new subparagraph 88(1)(c.4)(v), which removes the requirement in former subparagraph 88(1)(c.4)(v) that any shares of the parent issued on an amalgamation in exchange for shares of the subsidiary be redeemed, acquired or cancelled by the parent immediately after the amalgamation for money. The issue that this amendment addresses is set out in the following excerpt from a Department of Finance comfort letter dated May 2, 2002:

Your concern relates to a series of proposed transactions wherein a taxable Canadian corporation ("Bidco") acquires more than 66 2/3% but less than 90% of the shares of another corporation ("Targetco") under a takeover bid. To complete the takeover, Bidco implements what is commonly referred to as an amalgamation squeeze out. On the amalgamation, a new corporation ("Amalco") will issue common shares to Bidco and redeemable preferred shares to the minority shareholders of Targetco. Amalco will redeem the redeemable preferred shares immediately after the amalgamation for consideration that includes common shares of Bidco, as required under the applicable securities law. Following the redemption, Amalco will be a wholly-owned subsidiary of Bidco. Amalco will then be wound up into Bidco.

Your concern is that the redeemable preferred shares and the common shares of Bidco would not qualify as specified property as defined in paragraph 88(1)(c.4) of the Act and, therefore, such shares will be substituted property as defined in subparagraph 88(1)(c.3)(i) of the Act. Accordingly, the addition to the adjusted cost base of certain non-depreciable capital property of Amalco (the “bump”) provided in paragraphs 88(1)(c) and (d) of the Act would be unavailable on the winding-up of Amalco into Bidco.

In your view, the redemption of the redeemable preferred shares for common shares of Bidco does not violate any policy objectives underlying the bump rules. You state that, if the minority shareholders had tendered their shares of Targetco to Bidco under the takeover bid, the Bidco common shares received by them would have been specified property and, as a result, would not have been substituted property for the purpose of subparagraph 88(1)(c.3)(i). Accordingly, you request that we consider amending the definition of specified property in paragraph 88(1)(c.4) to accommodate the redemption of the redeemable preferred shares of Amalco for common shares of Bidco.

This amendment applies to windings-up that begin, and amalgamations that occur, after 2001.

Second, amended subparagraph 88(1)(c.4)(vi) provides that a share of the capital stock of a corporation issued to a person described in clause 88(1)(c)(vi)(B) is specified property if all the shares of the capital stock of the subsidiary were acquired by the parent for consideration that consists solely of money. This amendment effectively applies to windings-up that begin, and amalgamations that occur, after 2001 and before Announcement Date (subject to transitional relief for certain windings-up that begin, and amalgamations that occur, before July 2013).

Third, subparagraph 88(1)(c.4)(vi) is repealed. This amendment applies in respect of windings-up that begin, and amalgamations that occur, on or after Announcement Date (subject to grandfathering for certain windings-up that begin, and amalgamations that occur, before July 2013). This repeal is consequential on the amendment of subparagraph 88(1)(c.3)(i) to limit its application to cases where more than 10% of the fair market value of the property owned by a person after the acquisition of control is attributable to the particular property or properties. Accordingly, on and after Announcement Date, the 10% threshold applies and subparagraph 88(1)(c.4) is limited to the types of property previously described in that paragraph, with minor amendments to broaden the type of property that may be acquired in the course of an amalgamation squeeze-out.

ITA
88(1)(c.9)

New paragraph 88(1)(c.9) of the Act provides that, for the purposes of paragraph 88(1)(c.4), a reference to a share of the capital stock of a corporation includes a right to acquire a share of the capital stock of the corporation. This relieving change addresses a concern discussed in various Department of Finance comfort letters regarding the treatment of an option or a warrant as specified property where the option or warrant confers a right on the holder to acquire a share of the capital stock of a corporation that is specified property as defined by paragraph 88(1)(c.4).

This amendment applies to windings-up that begin, and amalgamations that occur, after 2001.

ITA
88(1)(d)(ii)

Paragraph 88(1)(d) of the Act determines, for the purposes of paragraph 88(1)(c), the amount by which the parent may increase or “bump” the adjusted cost base (ACB) of certain capital property (i.e., eligible property) acquired by it on the winding-up of its subsidiary. Subparagraph 88(1)(d)(ii) provides that the bump amount (i.e., the increase in ACB) cannot exceed the amount, if any, by which the fair market value of the capital 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 amended to limit the amount of the bump available in respect of property of the subsidiary acquired by the parent on the winding-up of the subsidiary. The amount designated in respect of any capital property eligible for a bump cannot exceed the amount determined by the formula A – (B + C) where

A is the amount that is the fair market value of the property at the time the parent last acquired control of the subsidiary, and

B is the amount that is the greater of the cost amount to the subsidiary of the property at the time the parent last acquired control of it and the cost amount to the subsidiary of the property immediately before the winding-up, and

C is the prescribed amount. For the prescribed amount, see subsections 5905(5.13) and (5.14) of the Income Tax Regulations. The prescribed amount is Nil except in the case of a foreign affiliate.

This change responds to transactions in which the amount of the bump available is increased by reducing the cost amount of the subsidiary’s property (for example, a partnership interest or share of another corporation) after the acquisition of control of the subsidiary and before its winding-up. The Canada Revenue Agency challenges these transactions where appropriate, including under the general anti-avoidance rule. However, specific legislative action is warranted to explicitly preclude such manipulations as well as to ensure that the amount of any particular bump in the cost of eligible property is appropriate.

This amendment applies to windings-up that begin, and amalgamations that occur, on or after Announcement Date with grandfathering for certain windings-up that begin, and amalgamations that occur, before July 2013.

Business limit, qualifying income limit and balance-due day of parent

ITA
88(1)(e.9)

Paragraph 88(1)(e.9) of the Act applies for the purposes of the definition “qualifying corporation” in subsection 127.1(2) and for the one-month extension of the corporation’s balance-due day under subparagraph (d)(i) of the definition “balance-due day” in subsection 248(1). The definition “qualifying corporation” is relevant for determining a new corporation’s eligibility for refundable investment tax credits under section 127.1.

Clauses 88(1)(e.9)(i)(A) and (ii)(A) provide that a parent corporation’s taxable income for a specified previous taxation year is increased by the taxable income of its subsidiary for the subsidiary’s taxation years that end in the same calendar year as the specified previous taxation year. Clauses 88(1)(e.9)(i)(B) and (ii)(B) provide a similar rule for computing the parent corporation’s business limit for the specified previous taxation year. The specified previous taxation year is consistent with the taxation year specified under the definition “qualifying corporation” in subsection 127.1(2) and under subparagraph (d)(i) of the definition “balance-due day” in subsection 248(1).

However, the qualifying income limit of a corporation is also relevant for the purposes of the definition “qualifying corporation” in subsection 127.1(2). Therefore, new clauses 88(1)(e.9)(i)(C) and (ii)(C) are introduced to provide that a parent corporation’s qualifying income limit for a specified previous taxation year is increased by the qualifying income limits of its subsidiary for the subsidiary’s taxation years that end in the same calendar year as the specified previous taxation year.

In addition, subparagraph 88(1)(e.9)(iii), which applies where parent and the subsidiary are associated with each other, is amended to add a reference to qualifying income limit.

Consistent with the application date of the definition “qualifying income limit” in subsection 127.1(2), these amendments apply to windings-up that begin after February 25, 2008.

Clause 19

Members deemed carrying on business

ITA
96(1.6)

Subsection 96(1.6) of the Act deems residual members of a partnership that carries on a business in Canada to be carrying on business in Canada for the purposes of subsection 2(3). Subsection 96(1.6) is amended consequential on the enactment of subsection 34.2(18), which is part of the corporate partnership deferral rules introduced in 2011.

This amendment applies to taxation years that end after March 22, 2011.

Clause 20

Definitions

ITA
111(8)

“Farm loss”

Section 111 of the Act provides rules relating to the treatment of losses and establishes the extent to which amounts may be deducted in computing a taxpayer’s taxable income for a taxation year in respect of losses incurred in other taxation years. The definition “farm loss” in subsection 111(8) is amended to remove a reference to the amount determined for C in the formula in the definition “non-capital loss” in subsection 111(8). Variable C in that formula was repealed by S.C. 2000, c. 19.

This amendment comes into force on Royal Assent.

Clause 21

Non-resident employed as aircraft pilot

ITA
115(3)

Section 115 of the Act contains rules that determine a non-resident person’s taxable income earned in Canada, which is subject to tax in Canada under Part I of the Act. This determination is generally a question of fact and it is particularly difficult in the context of a non-resident aircraft pilot who is employed by a Canadian airline and who flies international flights.

The Act does not contain specific rules for determining what portion of a non-resident pilot’s income is attributable to duties performed in Canada (and is, therefore, part of the non-resident’s taxable income earned in Canada). There have been judicial decisions on the determination of income attributable to duties performed in Canada by a non-resident aircraft pilot (see Sutcliffe v. The Queen, 2006 TCC 812 and Price v. The Queen, 2011 TCC 449) and the methods used in those decisions for income attribution have been highly complex. This complexity has been criticized by the Tax Court of Canada.

In order to simplify the determination of taxable income earned in Canada and to provide greater certainty to taxpayers, new subsection 115(3) introduces rules for determining the Canadian source income of a non-resident aircraft pilot who is employed by a Canadian airline. For the purposes of subsection 115(1), the following income of a non-resident employed as a pilot, if it is paid directly or indirectly by a person resident in Canada, will be considered to be income from the duties of an office or employment performed in Canada:

  • all of the non-resident pilot’s income attributable to a flight that departs from a location in Canada and arrives at a location in Canada;
  • half of the non-resident pilot’s income attributable to a flight that departs from a location in Canada and arrives at a location outside Canada;
  • half of the non-resident pilot’s income attributable to a flight that departs from a location outside Canada and arrives at a location in Canada; and
  • none of the non-resident pilot’s income attributable to a flight that departs from a location outside Canada and arrives at a location outside Canada.

For these purposes, a flight will include any portion of a flight that involves a take-off and landing (i.e., each leg of a flight is considered a flight). Income that is not attributable to any specific flight will continue to be considered Canadian source if the income is received for services performed in Canada.

This amendment applies to the 2013 and subsequent taxation years.

Clause 22

Inclusion of ancillary fees and charges

ITA
118.5(3)

Subsection 118.5(3) of the Act allows an individual to include, for the purpose of calculating the tuition tax credit under subsection 118.5(1), certain mandatory ancillary fees and charges paid to a post-secondary educational institution in respect of the individual’s enrolment at the institution. Certain fees or charges are not eligible for this treatment. For instance, fees related to the provision of financial assistance to the individual are excluded by subparagraph 118.5(3)(c)(iv), except to the extent that the financial assistance would be taxable as a scholarship or other amount described in paragraph 56(1)(n).

Subparagraph 118.5(3)(c)(iv) is amended to clarify that fees related to the provision of financial assistance are excluded except to the extent that the amount of the assistance is required to be included in computing the income of the individual or would be required to be included but for the scholarship exemption in subsection 56(3).

This amendment applies to the 2012 and subsequent taxation years.

Clause 23

Canada child tax benefit – non-residents and part-year residents

ITA
122.61(3)

Section 122.61 provides for the calculation of the Canada child tax benefit (CCTB), which provides federal assistance to families through three components: base benefits for low- and middle-income families; the national child benefit supplement, which provides additional assistance for low-income families; and the child disability benefit, which provides assistance to the family of each eligible child who meets the eligibility criteria for the disability tax credit.

Paragraph 122.61(3)(b) provides that, for the purposes of section 122.61, a non-resident person’s “earned income” for the year includes only earned income that is taxable in Canada. Subsection 122.61(3) is restructured to repeal paragraph 122.61(3)(b), which is no longer required because of the repeal of the definition “earned income” in subsection 122.61(1) by S.C. 1998, c. 21.

This amendment comes into force on Royal Assent.

Clause 24

Canada child tax benefit – communication of information

ITA
122.64

Section 122.64 of the Act provides rules for the sharing of information obtained for the purposes of the Family Allowances Act or the Canada child tax benefit (CCTB). In general, this information may be shared for the purposes of the administration and enforcement of certain provincial and federal statutes. This section is repealed consequential on

  • the repeal of the Family Allowances Act;
  • the earlier enactment of subparagraphs 241(4)(e)(iii) and (viii) (regarding the Canada Pension Plan and the Old Age Security Act);
  • the amendment of subparagraph 241(4)(j.1) (regarding information relevant to the calculation of the CCTB); and
  • the amendment of paragraph 239(2.21)(b) and the addition of new paragraph 241(4)(j.2) (regarding the sharing and use of information for the purposes of administration and enforcement of a provincial law prescribed under new section 6500 of the Income Tax Regulations).

To ensure that taxpayer information is safe-guarded, section 241 prohibits the use or communication of taxpayer information by any official or other representative of the government except as otherwise authorized. New paragraph 241(4)(j.2), which replaces paragraph 122.64(2)(a), allows information relevant to the calculation of the CCTB to be provided to an official of the government of a province, solely for the purposes of the administration or enforcement of a prescribed law of the province.

Paragraph 122.64(2)(b) allows information obtained under the CCTB provisions or the Family Allowances Act to be provided to an official of the Department of Human Resources and Skills Development for the purposes of the administration of the Family Allowances Act, the Canada Pension Plan or the Old Age Security Act. This paragraph is repealed consequential on the repeal of the Family Allowances Act and the earlier enactment of subparagraphs 241(4)(e)(iii) and (viii), which allow information to be provided for the purposes of section 92 of the Canada Pension Plan and paragraph 33.1(a) of the Old Age Security Act, respectively.

Subsection 122.64(3) allows a taxpayer’s name and address, obtained under the child tax benefit provisions, to be communicated for the purposes of Part I of the Family Orders and Agreements Enforcement Assistance Act. This subsection is unnecessary because subparagraph 241(4)(e)(vii) provides for the release of information obtained under the child tax benefits provisions for the purposes of section 79 of the Family Orders and Agreements Enforcement Assistance Act.

Subsection 122.64(4) provides that the unauthorized use or communication of information obtained under subsection 122.64(2) or (3) constitutes an offence and any person convicted of such an offence is liable to a fine not exceeding $5,000, imprisonment or both. This subsection is repealed consequential on the amendment of paragraph 239(2.21)(b) to provide that unauthorized use or communication of information obtained under subparagraph 241(4)(j.2) will constitute an offence and any person convicted of such an offence is liable to a fine not exceeding $5,000, imprisonment or both.

The repeal of section 122.64 comes into force on Royal Assent.

Clause 25

Specified partnership income

ITA
125(7)

Subsection 125(7) of the Act provides definitions for certain terms used in section 125 in respect of the corporate “small business deduction” for Canadian-controlled private corporations (CCPCs).  The term “specified partnership income” is defined in subsection 125(7) by reference to a formula and is used in determining the small business deduction of a CCPC that carries on an active business through a partnership.

The definition “specified partnership income” is amended in two ways consequential on the introduction of the corporate partnership deferral rules in section 34.2. First, the description of G – which refers to a corporation’s share of income of an active business carried on in Canada by a corporation as a member of a partnership – in paragraph (a) of the description of A in the formula in the definition is amended to expressly refer to amounts included in the corporation’s income for the year under subsections 34.2(2), (3) and (12) in respect of the business because of the corporate partnership deferral rules.

Second, a similar amendment is made to the description of H – which refers to a corporation’s deductions in computing the corporation’s income for the year from the business (other than amounts deducted by the partnership) – in paragraph (a) of the description of A in the formula in the definition to expressly refer to amounts deducted for the year by the corporation under subsections 34.2(4) and (11) in respect of the business because of the corporate partnership deferral rules.

These amendments apply to taxation years that end after March 22, 2011.

Clause 26

Deductions from Part I tax

ITA
127

Section 127 of the Act allows a taxpayer to take certain deductions in computing tax payable for logging taxes, political contributions and investment tax credits.

Definitions

ITA
127(9)

Subsection 127(9) of the Act provides various definitions relevant for the purpose of calculating the investment tax credits of taxpayers.

“non-government assistance”

The definition “non-government assistance” in subsection 127(9) is relevant for various provisions in section 127 that require the investment tax credit to be calculated by reference to the cost of property or the amount of an expenditure made net of any grant, inducement or other assistance received in respect of the cost of the property or the expenditure.

The definition is amended by replacing the reference to “subparagraphs 12(1)(x)(vi) and (vii)” with “subparagraphs 12(1)(x)(v) to (vii)”. This amendment ensures that the definition “non-government assistance” in subsection 127(9) is consistent with the definition “assistance” in subsection 125.4(1).

This amendment comes into force on Announcement Date.

Clause 27

Refundable investment tax credit

ITA
127.1

Section 127.1 provides for the refundability of investment tax credits in certain circumstances.

Definitions

ITA
127.1(2)

Subsection 127.1(2) sets out definitions relevant for the purposes of section 127.1.

“qualifying corporation”

A qualifying corporation may be eligible for either a 40% or 100% refund for its investment tax credits, depending on the nature of its expenditures. A qualifying corporation for a particular taxation year is a Canadian-controlled private corporation the taxable income of which for its preceding taxation year, together with the taxable incomes of all associated corporations for their preceding taxation years, does not exceed the qualifying income limit of the corporation for the particular year.

The definition is amended by adding the term “if any” after “does not exceed its qualifying income limit”. This amendment clarifies that a corporation can only be a qualifying corporation if it has a qualifying income limit.

This amendment applies to taxation years that begin after Announcement Date.

Clause 28

Adjusted taxable income determined

ITA
127.52(1)(c.1)

Subsection 127.52(1) of the Act defines the “adjusted taxable income’ of an individual for the purposes of determining the individual’s minimum tax liability under Division E.1 of Part I of the Act. An individual’s “adjusted taxable income” for a taxation year is the amount that would be the individual’s taxable income for that year if the assumptions set out in paragraphs 127.52(1)(b) to (j) were made. In particular, paragraph 127.52(1)(c.1) applies to exclude certain losses deducted by a limited partner, a member of a partnership who has been a specified member since becoming a partner, or a partner whose interest is required to be, or has been, registered as a tax shelter under section 237.1.

The deduction of limited partnership losses is generally denied for Alternative Minimum Tax (AMT) purposes to the extent the taxpayer does not also realize taxable capital gains from the limited partnership in the same taxation year. Furthermore, the carryforward of those denied limited partnership losses to offset income for AMT purposes in a future year is not permitted. For further information, please see the commentary on paragraph 127.52(1)(i).

Paragraph 127.52(1)(c.1) is amended to apply to restrict an individual’s limited partnership loss for the purpose of calculating the AMT only if the individual’s interest in the partnership is an interest for which an identification number is required to be, or has been, obtained under section 237.1.

This amendment applies to the 2012 and subsequent taxation years and, if an individual files an election in writing with the Minister of National Revenue before the day that is 90 days after Royal Assent, to the individual’s 2006 to 2011 taxation years as well.

ITA
127.52(1)(i)(i)(B)(II) and (ii)(B)(II)

For the purpose of calculating an individual’s adjusted taxable income for the AMT, paragraph 127.52(1)(i) of the Act restricts the application of an individual’s losses arising in other taxation years that are deductible in computing the individual’s taxable income under Part I of the Act. Paragraph 127.52(1)(i) restricts the amounts of losses under section 111 for other taxation years that may be claimed for the purposes of calculating adjusted taxable income for AMT purposes. In general, if, for AMT purposes, such losses would have been reduced in calculating adjusted taxable income for the taxation years in which the losses arose, they will not be available in the calculating adjusted taxable income for the current taxation year. In this regard, clauses 127.52(1)(i)(i)(B) and (ii)(B) clarify that the calculation of those losses for the other years is by reference to how the relevant portions of subsection 127.52(1) applied in those other taxation years.

Clause 127.52(1)(i)(i)(B) is amended consequential on the amendment of paragraph 127.52(1)(c.1). Subclause 127.52(1)(i)(i)(B)(II) is amended to provide that, in computing the amounts deductible under paragraphs 111(1)(a), (c), (d) and (e) for AMT purposes for a taxation year, the amount of a taxpayer’s non-capital loss, restricted farm loss, farm loss or limited partnership loss incurred in a taxation year that began after 1994 and ended before 2012 should be computed as if paragraphs 127.52(1)(b) to (c.3), (e) and (e.1) applied to restrict these amounts. In this regard, paragraphs 127.52(1)(b) to (c.3), (e) and (e.1) are to be read as they applied in respect of taxation years that began after 1994 and ended before 2012.

Similarly, subclause 127.52(1)(i)(i)(B)(III) is added with the same effect in respect of losses that arise in a taxation year that ends after 2011, except that paragraphs 127.52(1)(b) to (c.3), (e) and (e.1) are to be read as they applied in respect of taxation years that end after 2011.

Subclause 127.52(1)(i)(ii)(B)(II) is amended, and (ii)(B)(III) is added, in a similar manner, applicable in respect of the calculation of net capital losses.

These amendments generally apply to the 2012 and subsequent taxation years. However, if the election referred to in the commentary on paragraph 127.52(1)(c.1) is filed by an individual, the references in clauses 127.52(1)(i)(i)(B) and (ii)(B) to “2011” and “2012” are to be read as “2005” and “2006”, respectively (i.e., these amendments will apply to the individual’s 2006 to 2011 taxation years as well).

Clause 29

Cooperative corporations

ITA
136(1)

Section 136 of the Act provides rules that apply to cooperative corporations. For the purposes of the Act, cooperatives corporations are generally considered not to be private corporations. However, subsection 136(1) provides that a cooperative corporation that would otherwise be a private corporation is treated as a private corporation for the purposes of specified provisions, notably section 125. Subsection 136(1) is amended to add other provisions for which a cooperative can be treated as a private corporation, and to put the provisions referred to in the subsection in numerical order. In particular, a cooperative corporation will be treated as a private corporation for the purposes of the rules relating to eligible dividends in respect of which Canadian-resident individual shareholders may obtain an enhanced dividend tax credit.

In general, section 89 sets out the rules for determining whether a corporation may make an eligible dividend designation. A Canadian-controlled private corporation (CCPC) may make an eligible dividend designation in respect of a taxable dividend that it pays to its Canadian-resident shareholders if it has a positive balance in its general rate income pool in respect of the dividend. Any other corporation may make an eligible dividend designation in respect of a taxable dividend to the extent that it does not have a low rate income pool. Because of the amendment to subsection 136(1), a cooperative corporation will be considered a private corporation, and possibly as a CCPC, when paying a taxable dividend to its shareholders. Subsection 136(1) is also amended to refer to other rules of the Act that are related to the eligible dividend rules, namely rules that apply in the context of amalgamations and windings-up of corporations, excessive eligible dividend designations and corporations becoming or ceasing to be a CCPC during a taxation year.

This amendment applies to taxation years that begin after Announcement Date.

Clause 30

Credit unions

ITA
137(4.1)

Payments in respect of shares

Subsection 137(4.1) of the Act provides rules relating to the treatment of amounts paid or payable by a credit union in respect of an unlisted share of its capital stock. In particular, it provides that where such an amount is paid or payable to a member of the credit union, the amount (or, in certain circumstances, the portion of the amount in excess of the paid-up capital of the share) is treated as interest, rather than as a dividend.

Subsection 137(4.1) is amended in three respects. First, the subsection’s structure is updated. Accordingly, the conditions for deemed interest treatment for amounts paid or payable by a credit union are set out in three new paragraphs. New paragraph 137(4.1)(a) provides the existing condition that the amount be in respect of a share of a class of the capital stock of the credit union (other than an amount paid or payable as or on account of a reduction of the paid-up capital, redemption, acquisition or cancellation of the share by the credit union to the extent of the paid-up capital of the share). New paragraph 137(4.1)(b) provides the existing condition with respect to being listed on a stock exchange. New subparagraph 137(4.1)(c)(i) provides the existing condition that the amount be paid or payable to a member of the credit union.

Second, the subsection is amended to replace the existing reference to “designated stock exchange” with “stock exchange”. This change is consistent with the commitment in the 2007 federal budget to review the appropriateness of using alternatives to the term “designated stock exchange” in the provisions of the Act. This change is made in new paragraph 137(4.1)(b).

Third, the subsection is amended to provide that, in respect of shares issued by a particular credit union after March 28, 2012, in determining whether an amount paid or payable by the particular credit union to the shareholder is treated as interest, the shareholder will be treated as a member of the particular credit union if the shareholder is a member of another credit union that in turn is a member of the particular credit union. This change is reflected in new subparagraph 137(4.1)(c)(ii).

This amendment applies to the 2012 and subsequent taxation years.

Clause 31

Mark-to-market property

ITA
142.2(2)

The definition “mark-to-market property” in subsection 142.2(1) of the Act excludes, through the definition “excluded property” in subsection 142.2(1), a share of a corporation in which a taxpayer has a significant interest. Subsections 142.2(2) to (4) contain the definition “significant interest” and related rules.

Prior to various amendments made to section 142.2 by S.C. 2009, c. 2, the definition “mark-to-market property” had a reference to “significant interest” and section 142.2 contained subsection 142.2(5). Under those amendments (which were consequential on changes in accounting rules), the definition “mark-to-market property” was modified to remove the reference to a share of a corporation in which a taxpayer has a significant interest and the reference was incorporated into the new definition “excluded property” referred to above. In addition, subsection 142.2(5) was repealed.

Accordingly, subsection 142.2(2) is amended to remove references to the definition “mark-to-market property” and subsection 142.2(5).

This amendment comes into force on Royal Assent.

Clause 32

Payment by corporation

ITA
157

Section 157 of the Act sets out the required payment dates for corporate income tax instalments and for any balance of corporate income tax payable. In general, a corporation is required to pay its tax liability for a taxation year in monthly instalments during the year as set out in subsection 157(1). However, subsection 157(1.1) allows small-Canadian-controlled private corporations (small-CCPCs) that meet the conditions set out in subsection 157(1.2) to pay their tax by quarterly, instead of monthly, instalments.

No longer a small-CCPC

ITA
157(1.5)

Subsection 157(1.5) of the Act sets out the rules for the monthly payment of tax by the corporation that previously qualified, as a small-CCPC, to pay quarterly tax instalments. The subsection in the English version of the Act is amended to correct two typographical errors.

Clause 157(1.5)(a)(ii)(B) of the English version of the Act is amended to correct a reference to “Parts VI and XIII.1”. Paragraph 157(1.5)(b) of the English version of the Act is amended to correct a reference to “balance-due day”.

Consistent with the introduction of subsection 157(1.5), these amendments apply to taxation years that begin after 2007.

Clause 33

Taxes in respect of certain registered plans

ITA
207.01

Budget 2011 extended certain special taxes on “advantages” and “prohibited investments” that apply in respect of tax-free savings accounts (TFSAs) to registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). On June 12, 2012, the Department of Finance issued a letter to the Joint Committee on Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants (the “Joint Committee letter”) in which the Department agreed to recommend certain relieving and clarifying changes to the advantage and prohibited investment rules in Part XI.01 of the Act. The changes described below reflect the recommendations included in the Joint Committee letter, as well as certain other relieving and technical changes to Part XI.01. In general, these amendments to section 207.01 apply from March 23, 2011, the effective date of the extension of Part XI.01 to RRSPs and RRIFs. Any differing effective dates are noted below.

Definitions

ITA
207.01(1)

Subsection 207.01(1) of the Act provides definitions that are relevant for the purposes of special taxes that may apply in respect of TFSAs, RRSPs and RRIFs. The introductory portion of subsection 207.01(1) is amended consequential on the introduction of the definition “excluded property” in subsection 207.01(1), and the related repeal of Part L of the Income Tax Regulations, to remove the reference to Part L. In addition, the definition “equity” is introduced, and several existing definitions are amended, as a consequence of the Joint Committee letter.

“advantage”

Amounts described in the definition “advantage” are subject to a special tax under section 207.05 equal to their fair market value. The definition “advantage” is amended in three respects. First, a new exception is created in paragraph (a) of the definition to accommodate reasonable incentive programs frequently offered by plan issuers, as long as these programs are not established mainly for tax purposes. It is anticipated that this exception will accommodate conventional, widely-offered promotional incentives – such as modest fee rebates or favourable rates of return – which could be viewed as conditional on the existence of a registered plan (for example, where customers are able to obtain more favourable treatment by having more than one product with a particular issuer).

Second, clause (b)(i)(A) of the definition “advantage” is amended to replace the reference to “open market” with “a normal commercial or investment context”, consistent with the Joint Committee letter, to address concerns that the phrase “open market” could be interpreted very narrowly. Finally, paragraph (c) of the definition “advantage” is amended to make the description of income and capital gains more consistent with similar usage elsewhere in the Act, and to clarify that the dividend gross-up is not included in the amount of an advantage that is a dividend.

“equity”

To facilitate the new exclusion from the concept “prohibited investment” described in the Joint Committee letter, the new definition “equity” is added to subsection 207.01(1). The definition is similar to the existing definition of the same term in subsection 122.1(1). Like the subsection 122.1(1) definition, it includes trust and partnership interests as well as shares in a corporation. Unlike the subsection 122.1(1) definition, it does not include debt, or rights to acquire shares or other interests described in the definition.

The definition “equity” is used in the new definition “excluded property”, which is a category of property that is excluded from being a prohibited investment.

“excluded property”

The new definition “excluded property” describes registered plan investments that are excluded from being prohibited investments for the TFSA, RRSP or RRIF that holds it. The new definition replaces, and expands on, prescribed excluded property as defined in existing section 5000 of the Income Tax Regulations, which is repealed. There are three categories of “excluded property” and they are set out in paragraphs (a), (b) and (c) of the new definition.

Certain insured mortgages

New paragraph (a) of the definition “excluded property” refers to property described in paragraph 4900(1)(j.1) of the Income Tax Regulations. Paragraph 4900(1)(j.1) describes certain insured mortgages. This category of excluded property was previously found in paragraph 5000(a) of the Income Tax Regulations.

Investment fund start-up and wind-up

New paragraph (b) of the definition “excluded property” replaces and broadens the existing exclusion in paragraph 5000(b) of the Income Tax Regulations. It provides that equity in certain investment vehicles (in these notes referred to as “funds”) during the 24-month period on start-up or wind-up is considered “excluded property” and therefore is not subject to the prohibited investment rules. To qualify under new paragraph (b), a fund must be a mutual fund corporation, mutual fund trust or a registered investment (as defined in the Act) and must meet the three conditions in subparagraphs (i), (iii) and (iv) of paragraph (b). Subparagraph (b)(ii) provides the two 24-month periods for start-up and wind-up.

Subparagraph (b)(i) requires that the fund either be an NI 81-102 fund (i.e., a fund that is subject to, and substantially complies with, the requirements of National Instrument 81-102 Mutual Funds of the Canadian Securities Administrators) or that the fund follow a reasonable policy of investment diversification. This latter rule is intended to be a reasonably flexible test that will avoid both the risk of disqualifying a fund for minor breaches of, for example, a percentage test, and the need for potentially complex carve-outs and timing rules. At the same time, it is expected that if one of the main purposes of establishing the fund is to facilitate unintended tax avoidance, the fund would have difficulty satisfying this test.

In this regard, subparagraph (b)(iii) provides an explicit requirement that it be reasonable to conclude that none of the main purposes of the fund be to engage in the general types of tax planning that are targeted by the rules in Part XI.01 of the Act. These types of planning (which, depending on the type of registered plan and the profile of the investor, are either designed to divert or stream income or gains into plans, or, conversely, to devalue plans to avoid an income inclusion as amounts are withdrawn) can generally be described as affecting the fair market value of property held by the registered plans in a manner that would not occur in a normal commercial or investment context.

Subparagraph (b)(iv) is also an anti-avoidance rule. Its main purpose is to forestall the establishment of funds on a temporary basis (i.e., approximately four years) with a view to attempting to benefit from the exception provided by paragraph (b). It could also apply to a longer-term fund if the facts (for example, a relatively short life span for the fund in combination with a period of comparative inactivity in the middle years of the fund) suggest that one of the main purposes of the structure is to exploit the exception.

Alternative widely-held test

New paragraph (c) of the definition “excluded property” provides a carve-out from the prohibited investment rules for equity that meets seven conditions, which, in effect, test whether an investment represents a low risk of self-dealing even though the investment would or might otherwise be a prohibited investment. The paragraph refers to the equity-issuing entity as the “investment entity” and refers to equity (as defined in new subsection 207.01(1)) held by persons who deal at arm’s length with the controlling individual of the registered plan as “arm’s length equity”.

New subparagraph (c)(i) requires that the fair market value of the arm’s length equity must equal at least 90% of the fair market value of all the equity of the investment entity. This provision is intended to ensure that the controlling individual – while technically holding what would otherwise be a prohibited investment – is respecting the policy intent of the prohibited investment concept in terms of equity value.

New subparagraph (c)(ii) is a very similar 90%-of-value-at-arm’s-length test to the test in new subparagraph (c)(i), except that it applies to both equity and debt of the investment entity.

New subparagraph (c)(iii) requires that the owners of the arm’s length equity in the investment entity have the right to cast at least 90% of the votes that could be cast at an annual meeting of the investment entity.

 New subparagraph (c)(iv) requires that the terms and conditions that apply to the equity in the investment entity held by the registered plan be the same as, or substantially similar to, the terms and conditions of at least some of the arm’s length equity (referred to in the provision as the “particular equity”). Among other things, significant differences in rights to income, gains, return of capital or voting would not be expected to meet this condition.

New subparagraph (c)(v) relates to the “particular equity” referred to in new subparagraph (c)(iv). That is, it deals with the arm’s length equity that has terms and conditions that are the same as, or substantially similar to, those of the investment held in the registered plan. New subparagraph (c)(v) requires that the particular equity be worth at least 10% of the fair market value of all the equity of the investment entity that has those substantially similar terms and conditions. The intention of this provision is to ensure that arm’s length persons (in relation to the controlling individual) have a larger-than-nominal portion of the style and type of equity held in the controlling individual’s registered plan.

New subparagraph (c)(vi) requires that the controlling individual deal at arm’s length with the investment entity. Similarly, new subparagraph (c)(vii) functions effectively as an anti-avoidance rule in relation to the other conditions in paragraph (c). Specifically, new subparagraph (c)(vii) requires that it be reasonable to conclude that none of the main purposes of the structure of the investment entity or the terms and conditions of the equity is to accommodate transactions or events that could affect the fair market value of property held in the registered plan in a manner that would not occur in a normal commercial or investment context in which people deal with each other at arm’s length and prudently, knowledgeably and willingly. (Depending on the type of registered plan and the age of the controlling individuals, tax planning arrangements may seek to stream income or gains into a registered plan, in effect circumventing the contribution limits for the plan, or may instead seek to reduce the fair market value of plan assets in an effort to avoid or reduce RRIF minimum withdrawal requirements.)

“exempt contribution”

In general terms, an exempt contribution is a TFSA contribution made by an individual (the survivor) with proceeds received from an arrangement that was the TFSA of the survivor’s deceased spouse. The definition is amended to allow the Minister of National Revenue to extend the time within which the survivor must designate the contribution as an exempt contribution.

“prohibited investment”

The holding of a prohibited investment in a registered plan generally results in a liability for tax under section 207.04. The definition is amended, consequential on the introduction of the definition “excluded property” in subsection 207.01(1), to remove the word “prescribed”. Section 5000 of the Income Tax Regulations, which current lists what constitutes prescribed excluded property, is repealed and its provisions are added to the new definition “excluded property”. The definition “prohibited investment” is also amended to clarify that excluded property is excluded property for a particular trust governed by a registered plan.

Subparagraph (b)(ii) of the definition is amended to eliminate the phrase “or with a person or partnership described in subparagraph (i)”. This relieving change was included in the Joint Committee letter and it has the effect of reducing the likelihood that an individual would have a prohibited investment in circumstances where the connection between the investment and the individual is less direct. For example, if an individual has a small portfolio interest in their RRSP in a corporation that controls a second corporation of which the individuals owns 11% of a class of shares, the RRSP investment would, without this amendment, be a prohibited investment for the individual.

In order to ensure consistency with the original coming-into-force provision for the definition “prohibited investment”, this amendment applies after March 22, 2011 in respect of investments acquired at any time.

“RRSP strip”

An RRSP strip, in general terms, is a transaction that, contrary to the intent of the RRSP and RRIF rules, seeks to remove or devalue RRSP or RRIF assets without an income inclusion for the annuitant. The portion of the definition before the list of exceptions in paragraphs (a) to (d) is re-worded to better target transactions in which there is an actual reduction in the value of property held in connection with an RRSP or RRIF. The amended wording is also more consistent with the wording of the definition “RCA strip” in subsection 207.5(1). Paragraph (d) of the definition is also amended, consequential on the introduction of the new definition “excluded property”, which replaces “prescribed excluded property” as described in section 5000 of the Income Tax Regulations. For further information, please see the commentary on the definition “excluded property”.

“specified non-qualified investment income”

In general terms, an amount is specified non-qualified investment income if it is income from, or a capital gain on, a non-qualified investment for a registered plan (i.e., a TFSA, RRSP or RRIF). Under subsection 207.06(4), the Minister of National Revenue may issue a notice requiring the removal from a registered plan of an amount equal to the plan’s specified non-qualified investment income, failing which, the amount will be considered an advantage. The definition “specified non-qualified investment income” is amended to make the description of income and capital gains more consistent with similar usage elsewhere in the Act, and to clarify that the dividend gross-up is not included in the amount of an advantage that is a dividend.

“swap transaction”

A “swap transaction” is, in general terms, a transfer of property between a controlling individual of a registered plan (or a person with whom the controlling individual does not deal at arm’s length) and a registered plan of the individual. It is subject to certain exceptions listed in paragraphs (a) to (d) of the definition. The exception in paragraph (c) of the definition, which is intended to facilitate the removal of a prohibited or non-qualified investment from a registered plan, is amended, consistent with the Joint Committee letter, to clarify that consideration paid to the registered plan (and not just the removal of the investment) is part of the excluded transaction and that as a consequence neither side of the transaction is a swap transaction.

 In order to ensure consistency with the original coming-into-force provision for the definition “swap transaction”, this amendment comes into force on July 1, 2011, except that it comes into force on January 1, 2022 in relation to a swap transaction undertaken to remove a property from an RRSP or RRIF if it is reasonable to conclude that the retention of the property in the RRSP or RRIF would result in a tax being payable under Part XI.01 of the Act.

“transitional prohibited investment benefit”

The definition “transitional prohibited investment benefit” generally refers to income from, or a capital gain on, a prohibited investment held by an RRSP or RRIF on March 23, 2011. A transitional prohibited investment benefit is eligible for relief from the advantage tax. Where income (or all or a portion of a realized capital gain) meets this definition, subsection 207.05(4) allows a taxpayer to elect not to have the advantage tax apply in respect of the income or gain as long as the amount of the income or gain is withdrawn from the taxpayer’s RRSP or RRIF.

The definition “transitional prohibited investment benefit” is amended in two respects. First, similar to changes described above in relation to the definitions “specified non-qualified investment income” and “advantage”, the definition is amended to clarify that the dividend gross-up is not included in the amount of an advantage that is a dividend. Second, consistent with the Joint Committee letter, the requirement that the income or capital gain must be earned or realized, as the case may be, before 2022 is eliminated.

ITA
207.01(6) and (7)

New subsection 207.01(6) of the Act provides a deemed disposition rule for property that becomes, or ceases to be, a non-qualified investment or prohibited investment. More specifically, subsection 207.01(6) provides that a property held by a registered plan is deemed to have been disposed of immediately before the time that it became, or ceased to be, a non-qualified investment or a prohibited investment for proceeds of disposition equal to the property’s fair market value. The registered plan is also deemed to have reacquired the property for the same amount at the time of its change in status. This provision replaces existing subsection 207.04(5), which only applied when a property ceased to be a non-qualified investment or prohibited investment.

New subsection 207.01(7) provides a related rule that deals specifically with the effective date for the extension of the advantage and prohibited investment rules to RRSPs and RRIFs. New subsection 207.01(7) deems the cost of a “pre-budget” prohibited investment (that is, property held by an RRSP or RRIF on March 22, 2011 that was a prohibited investment on March 23, 2011) to be equal to its fair market value on March 22, 2011. This provision, which is consistent with the Canada Revenue Agency’s existing administrative practice, clarifies the calculation of capital gains and losses accruing after March 22, 2011 for purposes of the definition “transitional prohibited investment benefit” and the transitional relief available under subsection 207.05(4).

Clause 34

Deemed disposition and reacquisition

ITA
207.04(5)

Section 207.04 of the Act imposes taxes on the controlling individual of a registered plan (i.e., the holder of a TFSA or the annuitant of an RRSP or RRIF) if a trust governed by the registered plan holds a non-qualified investment or a prohibited investment. Subsection 207.04(5) provides a deemed disposition rule that applies where property ceases to be a non-qualified investment or a prohibited investment. Subsection 207.04(5) is repealed, consequential on the introduction of a more comprehensive deemed disposition rule in new subsection 207.01(6). For further information, please see the commentary on subsection 207.01(6).

This amendment comes into force on March 23, 2011.

Clause 35

Transitional prohibited investment benefit – filing rules

ITA
207.05(4)

Subsection 207.05(4) of the Act provides transitional relief from the advantage rules in respect of a “transitional prohibited investment benefit” (as defined in subsection 207.01(1)) if the amount is paid out of an RRSP or RRIF of the taxpayer within 90 days after the end of the relevant taxation year and if an election is filed in prescribed form. The deadline for filing this election (currently July 2012) is extended to March 2, 2013 so that taxpayers may determine whether they are affected by these amendments to Part XI.01.

This amendment comes into force on March 23, 2011.

Clause 36

Waiver of taxes

ITA
207.06(2) and (3)

Section 207.06 of the Act allows the Minister of National Revenue, in certain circumstances, to waive all or part of any tax imposed under sections 207.02, 207.03 or 207.05 or subsection 207.04(1). Subsection 207.06(2) provides that tax liabilities under subsection 207.04(1) (the tax on prohibited or non-qualified investments) or section 207.05 (the advantage tax) may be waived or cancelled if the Minister considers it just and equitable to do so, having regard to all the circumstances. It also lists particular circumstances that should be considered.

Subsection 207.06(3) requires that, before the Minister may provide the waiver or cancellation, payments must be made without delay from a taxpayer’s registered plan in an amount at least equal to the amount of the liability to be waived or cancelled. Consistent with the Joint Committee letter described above, subsection 207.06(3) is repealed. Instead new paragraph 207.06(2)(c) is added to the list of factors to be considered by the Minister and the paragraph refers to the making of payments from the taxpayer’s registered plan.

This amendment comes into force on March 23, 2011.

Clause 37

TFSA income inclusion

ITA
207.061

Section 207.061 of the Act requires a holder of a Tax-Free Savings Account (TFSA) to include certain amounts in computing their income. Section 207.061 is amended, consequential on the amendments to subsections 207.06(2) and (3) described above, to remove the reference to subsection 207.06(3) and to instead require the inclusion in income of an amount specified by the Minister of National Revenue as part of an agreement to waive or cancel a liability for tax under Part XI.01.

This amendment comes into force on March 23, 2011.

Clause 38

Return and payment of tax

ITA
207.07(1)

Subsection 207.07(1) of the Act requires a person liable for tax under Part XI.01 to file a return for the calendar year and pay any tax owing (net of the person’s allowable refund for the year) within 90 days after the end of the year.

To better coincide with the filing period for Part I returns, subsection 207.07(1) is amended to extend the deadline for filing Part XI.01 returns and paying the associated taxes to June 30th of the following year.

This amendment comes into force on Royal Assent.

Clause 39

Branch tax

ITA
219(1)(d)(ii)

Subparagraph 219(1)(d)(ii) of the Act is amended to replace the cross reference to paragraph 115(1)(e) by a cross reference to paragraph 115(1)(d). This is consequential on the amendment of paragraphs 115(1)(c) to (e) by S.C. 1999, c.22, applicable to 1998 and subsequent taxation years.

This amendment applies to 1998 and subsequent taxation years.

ITA
219(1.1)

Subsection 219(1.1) of the Act is amended to replace the cross reference to paragraphs (c) to (k) of the definition “taxable Canadian property” by a cross reference to paragraphs (c) to (e) of that definition. The reference to paragraph (l) of the definition “taxable Canadian property” is replaced by a cross reference to paragraph (f) of the same definition. This is consequential on the amendment of the definition of taxable Canadian property by Budget 2010.

This amendment comes into force on March 5, 2010.

Clause 40

Disclosure of information

ITA
239(2.21)(b)

Subsection 239(2.21) of the Act makes it an offence for a person to whom taxpayer information has been provided for a particular purpose to knowingly use, or to allow the unauthorized use of, that information for any other purpose. This offence is punishable on summary conviction by a fine not exceeding $5,000, imprisonment for a term not exceeding 12 months or both. Paragraph 239(2.21)(b) is amended to add a reference to new paragraph 241(1)(j.2). This amendment ensures that with the concurrent repeal of subsection 122.64(4) (which provides for the same penalty), subsection 239(2.21) will be applicable in respect of information that was within the ambit of subsection 122.64(4).

This amendment comes into force on Royal Assent.

Clause 41

Disclosure of information

ITA

241(4)

Section 241 of the Act prohibits the use or communication of taxpayer information by any official or other representative of the government, except as authorized. Subsection 241(4) authorizes the communication of information for limited purposes.

ITA
241(4)(d)(ix)

Subparagraph 241(4)(d)(ix) permits the disclosure of the name, address, occupation and size or type of business of a person to a government department or agency for the purpose of enabling that department or agency to obtain statistical data for research and analysis.

Subparagraph 241(4)(d)(ix) is amended to add “telephone number” to the list of the types of data that may be disclosed. This amendment will conform the Act to the equivalent provision in the Excise Tax Act.

This amendment comes into force on Royal Assent.

ITA
241(4)(j.1)

Paragraph 241(4)(j.1) authorizes the communication of information to an official or a designated person for the purpose of making adjustments to certain payments, including a payment pursuant to a prescribed law of a province. Consequential on the repeal of An Act respecting Family Benefits, R.S.Q, c. P-19.1, paragraph 241(4)(j.1) is amended by repealing subparagraph 241(4)(j.1)(ii). For further information, please see the commentary on Part XXX, and new section 6500, of the Income Tax Regulations.

This amendment comes into force on Royal Assent.

ITA
241(4)(j.2)

New paragraph 241(4)(j.2) is added concurrently with the repeal of section 122.64, to allow information relevant to the application of section 122.62 to be provided to an official of the government of a province, solely for the purposes of the administration or enforcement of a prescribed law of the province. New section 6500 of the Income Tax Regulations prescribes provincial laws for the purposes of paragraph 241(4)(j.2).

This amendment comes into force on Royal Assent.

Clause 42

Exclusion – certain guarantees

ITA
247(7.1)

Subsection 247(7) of the Act provides that subsection 247(2) does not apply to adjust the interest on loans (described in subsection 17(8)) that are made by a corporation resident in Canada to a non-resident subsidiary controlled corporation. New subsection 247(7.1) is introduced to provide a parallel exception for fees paid to a Canadian resident corporation for loan guarantees provided by it in respect of a non-resident subsidiary controlled corporation.

Subsection 247(7.1) provides that subsection 247(2) will not apply to adjust the amount of consideration paid, payable or accruing to a corporation resident in Canada (the Parent) in a taxation year of the Parent for the provision of a guarantee of the repayment, in whole or in part, of an amount owing by a non-resident person if the non-resident person is a controlled foreign affiliate of the Parent for the purposes of section 17 throughout the period in the year during which the particular amount is owing and it is established the amount owing would, if it were owed to the Parent, be described in paragraph 17(8)(a) or (b).

This amendment applies to taxation years that begin after 1997 and in applying subsection 247(7.1) to taxation years that begin before February 24, 1998, section 17 is to be read as it read on January 24, 2005. A taxpayer may also elect (in writing and filed with the Minister of National Revenue on or before the taxpayer’s filing-due date for the taxation year that includes Royal Assent) to not have subsection 247(7.1) apply for taxation years that begin on or before Announcement Date.

Clause 43

Definitions

ITA
248(1)

“automobile”

For the purposes of the Act, an “automobile” is defined as a motor vehicle designed primarily to carry individuals on highways and streets and having a seating capacity of not more than nine people (including the driver). However, various types of motor vehicles are excluded from the definition. Subparagraph (e)(iii) of the definition generally provides that an “automobile” does not include a pick-up truck used primarily for the transportation of goods, equipment or passengers in the course of earning or producing income at one or more remote or special worksites that are at least 30 kilometres from the nearest urban area having a population of at least 40,000 persons. “Urban area” is defined by Statistics Canada in the Census Dictionary.

Clause (e)(iii)(B) of the definition “automobile” is amended to replace the term “urban area” with “population centre” as a result of the adoption by Statistics Canada of the term “population centre” in place of “urban area”.

This amendment applies to the 2013 and subsequent taxation years.

Income Tax Regulations 

Clause 44

Prescribed obligation

ITR
806.2

Section 806.2 of the Income Tax Regulations (the Regulations) is amended to replace the cross reference to paragraph 212(1)(b) of the Act by a cross reference to the definition “participating debt interest” in subsection 212(3) of the Act. This is consequential on the amendment of paragraph 212(1)(b) by Budget 2007.

This amendment comes into force on January 1, 2008.

Clause 45

Capital cost allowance – deductions allowed

ITR
1100

A portion of the capital cost of depreciable property is deductible as capital cost allowance (CCA) each year. Section 1100 of the Regulations provides rules relating to the deduction of CCA. Subsection 1100(1) of the Regulations sets out the CCA rates that taxpayers may claim with respect to specified classes of depreciable property.

Subsections 1100(11), (15) and (24) of the Regulations limit the amount of CCA that a taxpayer may deduct because of subsection 1100(1) of the Regulations. These limits are intended to prevent taxpayers from sheltering other sources of income with losses created by CCA related to “rental property”, “leasing property” and “specified energy property”. Exceptions to these limits are provided by subsections 1100(12), (16), (25) and (26), and are generally in respect of principal business corporations and partnerships all of whose members are principal business corporations.

As explained below, the principal business exceptions in subsections 1100(12), (16), (25) and (26) are amended to extend those exceptions to tiered partnerships: that is, partnerships all of whose members are, throughout the fiscal period of the partnership, principal business corporations or other partnerships to which the exception applies.

A tax shelter, in common parlance (i.e., without reference to the definition in section 237.1 of the Act), is an investment or expenditure of a taxpayer that provides a deduction from income for tax purposes in respect of its cost that is in excess of the economic consumption of the relevant asset. The excess deduction will, absent limiting provisions in the income tax law, shelter income from taxation. An example would be CCA from efficient and renewable energy generation equipment that exceeds economic depreciation. Various provisions in the Act and Regulations limit such deductions, generally in situations where the income being sheltered is from a source other than the property itself or where the cost to the taxpayer might be mitigated through financing arrangements, revenue guarantees or other benefits.

In the case of the rules limiting CCA claims in respect of rental property and leasing property, the exception for principal business corporations reflects the policy that the limitation should not apply to a taxpayer who uses the property in an active business that earns substantially all its gross revenue from that property and similar property. The exception in respect of specified energy property is slightly different in that it applies if the principal business of the corporation is manufacturing or processing, mining or, in general, energy production.

These exceptions are permitted for principal business corporations (and partnerships the members of which are principal business corporations) because a principal business corporation is not an individual with other sources of income or a flow-through entity through which losses from the property might otherwise be allocated to other entities. As such, the use of a principal business corporation as a vehicle through which another person might invest in a rental property, leasing property or specified energy property, is considered an acceptable method for avoiding the application of these rules to limit CCA. This is, however, based on the expectation that the corporation is created as a going concern and not as a flow-through entity. If the intention or expectation of a taxpayer, in incorporating a principal business corporation through which to invest, is to incur for tax purposes losses in the corporation that could then be transferred to the taxpayer or to another person (whether by wind-up, amalgamation or any other series of transactions), the claiming of the losses by the taxpayer or other person would defeat the object of the rules that restrict the CCA deductions available in certain circumstances (unless the taxpayer or other person were also a principal business corporation).

Rental property

ITR
1100(12)(b)

Subsection 1100(12) of the Regulations provides an exception to the rule in subsection 1100(11) of the Regulations. Subsection 1100(11) limits the amount of CCA that a taxpayer may deduct because of subsection 1100(1) of the Regulations in respect of “rental property”. The deduction of CCA in respect of rental property owned by the taxpayer is generally limited to the amount, calculated without any allowance for CCA, by which the taxpayer’s income from renting or leasing a rental property exceeds the taxpayer’s loss from renting or leasing a rental property. “Rental property” for this purpose is defined in subsection 1100(14) to generally mean property owned by a taxpayer that is used principally for the purpose of gaining or producing gross revenue that is rent and that is

  • a building; or
  • a leasehold interest in real property, if the leasehold interest is property included in CCA Classes 1, 3, 6 or 13 in Schedule II to the Regulations.

The exception in subsection 1100(12) applies to life insurance corporations and certain principal business corporations. This exception extends to partnerships all of whose members are those excepted corporations. Paragraph 1100(12)(b) is amended to extend the exception to partnerships all of whose members are those excepted corporations or other partnerships that are excepted from application of the limitation in subsection 1100(11).

This amendment applies to fiscal periods that end after October 2010.

Leasing property

ITR
1100(16)(b)

Subsection 1100(16) of the Regulations provides an exception to the rule in subsection 1100(15) of the Regulations. Subsection 1100(15) limits the amount of CCA that a taxpayer may deduct under subsection 1100(1) of the Regulations in respect of “leasing property”. The deduction of CCA in respect of leasing property owned by the taxpayer is generally limited to the amount, calculated without any allowance for CCA, by which the taxpayer’s income from renting, leasing or earning royalties from leasing property exceeds the taxpayer’s loss from renting, leasing or earning royalties from leasing property. “Leasing property” for this purpose is defined in subsection 1100(17) of the Regulations to generally mean certain depreciable property, other than rental property and computer tax shelter property, owned by a taxpayer that is used principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue.

The exception in subsection 1100(16) applies to certain principal business corporations and to partnerships all the members of which are those principal business corporations. Paragraph 1100(16)(b) is amended to extend the exception to a partnership all of whose members are, throughout the fiscal period of the partnership, principal business corporations described in paragraph 1100(16)(a) or other partnerships to which paragraph 1100(16)(b) applies.

This amendment applies to fiscal periods that end after October 2010.

Specified energy property

ITR
1100(24) to (29)

Subsections 1100(24) to (29) of the Regulations provide rules that restrict CCA claims with respect to “specified energy property”.

ITR
1100(25)(b)(iv)

Subsection 1100(25) of the Regulations describes a “specified energy property”, in general, as efficient and renewable energy generation equipment included in CCA Class 34, 43.l, 43.2, 47 or 48 in Schedule II to the Regulations.

Paragraphs 1100(25)(a) and (b) exclude certain properties from the meaning of specified energy property. Subparagraph 1100(25)(b)(iv) generally excludes property leased in the year to certain persons or partnerships if the owner of the property was a principal business corporation described in paragraph 1100(25)(b)(iii) or a partnership each member of which was a principal business corporation described in subparagraph 1100(25)(b)(iii) or paragraph 1100(26)(a). Subparagraph 1100(25)(b)(iv) is amended to extend its application to partnerships all of whose members are, throughout the fiscal period of the partnership, principal business corporations described in paragraph 1100(25)(b)(iii) or partnerships to which subparagraph 1100(25)(b)(iv) applies.

This amendment applies to fiscal periods that end after October 2010.

ITR
1100(26)(b)

Subsection 1100(26) of the Regulations provides an exception to the rule in subsection 1100(24) of the Regulations. Subsection 1100(24) limits the amount of CCA that a taxpayer may deduct under subsection 1100(1) of the Regulations in respect of “specified energy property”. This limitation may restrict the extent to which the owners of such property benefit from an accelerated CCA rate.

The exception in subsection 1100(26) applies to certain principal business corporations described by paragraph 1100(26)(a) and to partnerships, all of whose members are certain principal business corporations. Paragraph 1100(26)(b) is amended to extend the exception to partnerships all of whose members are, throughout the fiscal period of the partnership, principal business corporations described in paragraph 1100(26)(a) or partnerships to which paragraph 1100(26)(b) applies.

This amendment applies to fiscal periods that end after October 2010.

Clause 46

Railway companies

ITR
1102(10)

Subsection 1102(10) of the Regulations prescribes the capital cost allowance class that applies when section 36 of the Act deems an expenditure made by a railway company to have been the acquisition of a depreciable property.

Subsection 1102(10) and the heading before it are repealed consequential on the repeal of section 36 of the Act. For further information, please see the commentary on section 36.

This repeal applies to expenditures incurred in taxation years that begin after Announcement Date.

Clauses 47 and 48

Communication of information

ITR
3003(c)

Part XXX

Sections 3003 and 3004 of the Regulations prescribe provincial laws for the purposes of paragraph 122.64(2)(a) and subparagraph 241(4)(j.1)(ii) of the Act, which allow certain information to be provided to an official of the government of a province, solely for the purposes of the administration or enforcement of the prescribed laws.

Paragraph 3003(c) of the Regulations is amended to replace the reference to An Act respecting Income Support, Employment Assistance and Social Solidarity, R.S.Q., c. S-32.001 with a reference to the Individual and Family Assistance Act, R.S.Q., c. A-13.1.1. This amendment comes into force on January 1, 2007.

Part XXX of the Regulations is repealed consequential on the repeal of section 122.64 of the Act and the repeal of An Act respecting Family Benefits, R.S.Q, c. P-19.1. This amendment is concurrent with the amendment to paragraph 241(4)(j.1) of the Act, the introduction of new subsection 241(4)(j.2) of the Act and the introduction of new section 6500 of the Regulations.

The repeal of Part XXX comes into force on Royal Assent.

Clauses 49 and 50

Prescribed property

ITR
4900(15)

Part XLIX

New subsection 4900(15) of the Regulations is introduced to replace existing section 5001 of the Regulations. This amendment is consequential on the repeal of Part L of the Regulations. The text of new subsection 4900(15) is the same as that of existing section 5001. Additionally, the heading before section 4900 of the Regulations is amended to better reflect the contents of Part XLIX of the Regulations.

These amendments come into force on March 23, 2011.

Clause 51

Excluded property

ITR
Part L

Part L of the Regulations is repealed. The contents of section 5000 of the Regulations are moved to the new definition “excluded property” in subsection 207.01(1) of the Act. For further information, please see the commentary on that definition. As well, the rule in section 5001 of the Regulations is moved to new subsection 4900(15) of the Regulations as described above.

This amendment comes into force on March 23, 2011.

Clause 52

Prescribed distributions

ITR
5600(1)

Subsection 5600(1) of the Regulations prescribes foreign spin-off distributions for the purposes of the foreign spin-off tax-deferred distribution rule in section 86.1 of the Act. Section 86.1 requires that various conditions be met before a distribution is considered to be an “eligible distribution”. The various conditions ensure, among other things, that Canadian shareholders of a foreign corporation are not treated more favourably with respect to a foreign distribution than Canadian shareholders receiving similar distributions from a Canadian corporation.

Certain distributions under the U.S. Internal Revenue Code are considered acceptable without the need for prescription, and this result is provided for in subsection 86.1(2) of the Act. Because there is not the same familiarity with the way in which other countries approach the taxation of spin-off transactions, there is the additional requirement that a non-U.S. foreign spin-off be prescribed. Subsection 5600(1) is amended to prescribe the following foreign spin-off distributions:

  • the distribution by Fiat S.p.A. of Italy of common shares of Fiat Industrial S.p.A. of Italy on January 1, 2011;
  • the distribution by Foster’s Group Limited of Australia of common shares of Treasury Wine Estates Limited of Australia on May 9, 2011; and
  • the distribution by Telecom Corporation of New Zealand Limited of common shares of Chorus Limited on November 30, 2011.

This amendment comes into force on January 1, 2011.

Clause 53

Prescribed laws

ITR
6500

New section 6500 of the Regulations, which prescribes provincial laws for the purposes of new paragraph 241(4)(j.2) of the Act, replaces section 3003 of the Regulations. Paragraph 241(4)(j.2) permits income tax information relating to taxpayers obtained under the Canada child tax benefit provisions of the Act by the Canada Revenue Agency to be shared with provincial governments for the purpose of administering a prescribed provincial law.

Section 6500 prescribes two laws of Quebec:

  • An Act respecting the Québec Pension Plan, R.S.Q., c. R-9; and
  • Individual and Family Assistance Act, R.S.Q., c. A-13.1.1, as it relates to the additional amounts for dependent children.

This amendment comes into force on Royal Assent.

Clause 54

Prescribed energy conservation property

ITR
8200.1

Section 8200.1 of the Regulations provides that, for the purposes of subsection 13(18.1) and subparagraph 241(4)(d)(vi.1) of the Act, “prescribed energy conservation property” means property described in capital cost allowance Classes 43.1 and 43.2 in Schedule II to the Regulations.

Section 8200.1 is amended to add a cross reference to the definition “Canadian renewable and conservation expense” (CRCE) in subsection 66.1(6) of the Act. This amendment ensures that the prescription of property in the section applies for the purposes of the definition CRCE.

This amendment comes into force on Announcement Date.

Clause 55

Prescribed international organizations

ITR
8900(1)

Subsection 8900(1) of the Regulations prescribes the United Nations and its specialized agencies as international organizations for the purposes of the deduction under subparagraph 110(1)(f)(iii) of the Act. This subsection is amended to also prescribe those organizations as international organizations for the purposes of paragraph 126(3)(a) of the Act. This amendment clarifies that, consistent with the deduction for income from employment with a “prescribed international organization” (such as the United Nations or its specialized agencies) in subparagraph 110(1)(f)(iii), a credit is not available under subsection 126(3) in respect of income from employment with the United Nations or its specialized agencies.

This amendment applies to the 2013 and subsequent taxation years.