Archived - Part 1 - Amendments to the Income Tax Act and Related Regulations

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Part 1

A. Lifetime Capital Gains Exemption (LCGE)

To increase the rewards of investing in small business, and to make it easier for owners to transfer their businesses to the next generation of Canadians, this measure will increase the LCGE by $50,000 so that it will apply on up to $800,000 of capital gains realized by an individual on qualifying property, effective for the 2014 taxation year. In addition, the LCGE will be indexed to inflation for taxation years after 2014.

The new LCGE limit will apply for all individuals, even those who have previously used the LCGE.

B. Registered Pension Plans (RPPs): Correcting Contribution Errors

This measure allows administrators of RPPs to make refunds of contributions in order to correct reasonable errors without first obtaining approval from the Canada Revenue Agency as long as the refund is made no later than December 31 of the year following the year in which the inadvertent contribution was made.

This measure applies in respect of RPP contributions made on or after the later of January 1, 2014 and the date of Royal Assent.

C. Reassessment Period for Reportable Transactions and Tax Shelters

To ensure that the Canada Revenue Agency has the information necessary for a proper audit of a tax shelter or reportable transaction, this measure extends the normal reassessment period where an information return that is required is not filed on time. Specifically, the normal reassessment period in respect of the tax shelter or reportable transaction will be extended to three years after the date that the relevant information return is filed.

This measure applies to taxation years that end after March 20, 2013.

D. Labour-Sponsored Venture Capital Corporations (LSVCCs)

In order to eliminate an inefficient and ineffective tax subsidy, this measure phases out the federal LSVCC tax credit.

The federal LSVCC tax credit will remain at 15% when it is claimed for a taxation year that ends before 2015 and will be reduced to 10% for the 2015 taxation year and 5% for the 2016 taxation year. The federal LSVCC tax credit will be eliminated for the 2017 and subsequent taxation years.

The measure also ends new federal LSVCC registrations as well as the prescription of new provincially registered LSVCCs for tax purposes.

An LSVCC will not be federally registered if the application for registration is received after March 20, 2013. A provincially registered LSVCC will not be prescribed for purposes of the federal LSVCC tax credit unless the application was submitted before March 21, 2013.

E. Character Conversion Transactions

Certain financial arrangements (character conversion transactions) seek to reduce tax by converting, through the use of derivative forward agreements, the returns on an investment that would have the character of fully taxable ordinary income to capital gains, only 50% of which are included in income.

To ensure the appropriate tax treatment of these derivative-based returns on a derivative forward agreement, this measure proposes to treat these returns as being distinct from the disposition of capital property that is purchased or sold under the agreement.

This measure generally applies to derivative forward agreements entered into after March 20, 2013.

F. Synthetic Dispositions

Certain financial arrangements (synthetic disposition transactions) seek to defer tax or obtain other tax benefits by allowing a taxpayer to economically dispose of a property while continuing to own it for income tax purposes.

To ensure that taxpayers cannot avoid paying their fair share by disposing of a property by entering into a synthetic disposition transaction, this measure treats certain transactions as dispositions at fair market value for income tax purposes. The property is then deemed to have been reacquired at a cost equal to its fair market value.

The measure also provides that if a taxpayer is deemed to have disposed of and reacquired a property, the taxpayer will be considered to not own the property for the purposes of determining whether the taxpayer meets certain holding-period tests in the Income Tax Act.

This measure generally applies to agreements and arrangements entered into after March 20, 2013.

G. Trust Tax Attributes

To address trust-related transactions that purport to enable one taxpayer to access the unused losses of another taxpayer, this measure extends to trusts the loss-streaming and related rules that currently apply to the acquisition of control of a corporation.

The measure triggers the application of loss-streaming and related rules to a trust if the trust is subject to a “loss restriction event”. A trust will be subject to a loss restriction event when a person or partnership becomes a majority-interest beneficiary of the trust or a group becomes a majority-interest group of beneficiaries of the trust. Existing rules that deem certain transactions or events to involve (or not involve) an acquisition of control of a corporation will be extended to apply, with appropriate modifications, in determining whether a trust is subject to a loss restriction event.

This measure generally applies to transactions that occur after March 20, 2013.

H. Non-Resident Trusts

To respond to the decision in The Queen v. Sommerer, 2012 FCA 207 and to protect the integrity of the tax rules that apply when a Canadian-resident taxpayer maintains effective ownership over property held by a non-resident trust, this measure amends the deemed residence rules in the Income Tax Act to apply if a trust holds property on conditions that grant effective ownership of the property to the taxpayer.

This measure also restricts the application of the trust income attribution rule in the Income Tax Act so that it applies only in respect of property held by a trust that is resident in Canada (determined without regard to the deemed residence rules).

This measure applies to taxation years that end after March 20, 2013.

I. Accelerated Capital Cost Allowance (CCA) for Clean Energy Generation Equipment

Under the CCA regime in the income tax system, Class 43.2 of Schedule II of the Income Tax Regulations provides for an accelerated CCA rate (50% per year on a declining balance basis) for certain clean energy generation equipment.

To further encourage businesses to invest in clean energy generation and energy efficiency equipment, this measure expands the biogas production equipment that is eligible for inclusion in Class 43.2 by providing that more types of eligible organic waste can be used in qualifying biogas production equipment. Specifically, eligible organic waste is expanded to include pulp and paper waste and wastewater, beverage industry waste and wastewater (for example, winery and distillery wastes), and separated organics from municipal waste.

This measure also expands eligibility under Class 43.2 by allowing all types of cleaning and upgrading equipment that can be used to treat eligible gases from waste to be included in Class 43.2.

This measure generally applies in respect of property acquired after March 20, 2013.

J. Scientific Research and Experimental Development (SR&ED) Program

In order to further enhance the integrity of the SR&ED program, this measure introduces a penalty of $1,000 in respect of each SR&ED program claim for which the information about SR&ED program tax preparers and billing arrangements is missing, incomplete or inaccurate.

In the case where a third-party SR&ED program tax preparer has been engaged, the SR&ED program claimant and the tax preparer will be jointly and severally, or solidarily, liable for the penalty.

This measure comes into force on the later of January 1, 2014 and Royal Assent.

K. Mining Expenses

For mining expenses there are two changes, both of which support the objective of making the tax system more neutral across mining and other industries.

First, pre-production mine development expenses, which are currently treated as Canadian Exploration Expenses (CEE), are to be treated as Canadian Development Expenses (CDE) for tax purposes. Whereas CEE is fully deductible in the year incurred, CDE is deductible at a rate of 30% per year on a declining-balance basis. The transition from CEE to CDE treatment is phased in over the period 2015 to 2017.

Second, the accelerated capital cost allowance provided for certain assets acquired for use in new mines or eligible mine expansions is phased out over the period 2017 to 2020. This is in addition to the phase-out announced in Budget 2007 for certain assets used in bituminous sands and oil shale, which will be complete in 2015.

L. Additional Deduction for Credit Unions

Economic Action Plan 2013 included a measure to improve the neutrality and fairness of the tax system by phasing out over five years the Additional Deduction for credit unions.

The Additional Deduction was implemented in the early 1970s to provide credit unions with access to the small business tax rate on a basis consistent with other corporations. Since that time, however, the application of the small business tax rate has changed significantly. As a result of those changes, the Additional Deduction now provides credit unions with access to a tax subsidy that is not available to other corporations.

Legislation giving effect to the phase-out of the Additional Deduction was enacted in the Economic Action Plan 2013 Act, No. 1. This measure remedies a purely technical issue with that earlier legislation.

This measure applies to taxation years that end after March 20, 2013, and therefore is consistent with the phase-out of the Additional Deduction.

M. Leveraged Life Insurance Arrangements

In order to improve the integrity and fairness of the tax system, this measure will eliminate unintended tax benefits relating to two leveraged life insurance arrangements commonly referred to as “leveraged insured annuities” and “10/8 arrangements”.

A leveraged insured annuity involves the use of borrowed funds in connection with a lifetime annuity and a life insurance policy. A 10/8 arrangement involves investing in a life insurance policy with a view to borrowing against that investment for the purpose of creating an annual interest-expense tax deduction. 

These amendments apply to taxation years that end after March 20, 2013.

N. Restricted Farm Losses

To respond to the decision in The Queen v. Craig, 2012 SCC 43 and to restore the intended policy for the restricted farm loss rules, this measure amends those rules to codify the chief source of income test as interpreted in Moldowan v. The Queen, [1978] 1 SCR 480. This amendment clarifies that a taxpayer’s other sources of income must be subordinate to farming in order for farming losses to be fully deductible against income from those other sources.

The measure also increases the restricted farm loss limit to $17,500 of deductible farm losses annually ($2,500 plus ½ of the next $30,000).

This measure applies to taxation years that end after March 20, 2013.

O. Corporate Loss Trading

To support the existing loss restriction rules that apply on the acquisition of control of a corporation, this measure introduces an anti-avoidance rule that deems there to have been an acquisition of control of a corporation that has loss pools if a person (or group of persons) acquires shares of the corporation that have more than 75% of the fair market value of all the shares of the corporation without otherwise acquiring control of the corporation, and it is reasonable to conclude that one of the main reasons that control was not acquired is to avoid the restrictions that would have been imposed on the use of losses.

This measure generally applies to transactions and events that occur after March 20, 2013.

P. Reassessment Period – Reporting Specified Foreign Property

To assist the Canada Revenue Agency in combating international tax evasion and aggressive tax avoidance, this measure will extend the normal reassessment period for a taxation year of a taxpayer by three years if:

  • the taxpayer has failed to report income from a specified foreign property on their annual income tax return; and
  • the Form T1135 was not filed on time by the taxpayer, or a specified foreign property was not identified, or was improperly identified, on the Form T1135.

This will allow CRA to obtain the necessary information to properly examine the foreign income reported on the taxpayer’s income tax return.

This measure applies to the 2013 and subsequent taxation years.

Q. Thin Capitalization Rules

To further improve the integrity and fairness of the thin capitalization rules, the scope of their application is extended to Canadian-resident trusts, and non-resident corporations and trusts that operate in Canada.

The trust portion of this measure modifies the thin capitalization rules for corporations to reflect the legal nature of trusts. In particular, trust beneficiaries will be used in place of shareholders for the purpose of determining whether a person is a specified non-resident in respect of the trust and, therefore, whether a debt owing to that person is included in the trust’s outstanding debts to specified non-residents. A trust’s “equity” for the purposes of the thin capitalization rules generally consists of contributions to the trust from specified non-residents plus the tax-paid earnings of the trust, less any capital distributions from the trust to specified non-residents. The permitted 1.5-to-1 debt-to-equity ratio will remain unchanged.

As well, this measure extends the application of the thin capitalization rules to non-resident corporations and trusts that carry on business in Canada. A loan that is used in a Canadian branch of a non-resident corporation or trust will be an outstanding debt to a specified non-resident for thin capitalization purposes if it is a loan from a non-resident who does not deal at arm’s length with the non-resident corporation or trust. A debt-to-asset ratio of 3-to-5 will be used, which parallels the 1.5-to-1 debt-to-equity ratio used for Canadian-resident corporations.

This measure applies to taxation years that begin after 2013.

R. Electronic Suppression of Sales (ESS) Software

To combat tax evasion by persons that use ESS software (commonly referred to as “zapper” software), which are designed to falsify records for the purpose of tax evasion, new administrative monetary penalties and criminal offences are being introduced under the Income Tax Act (similar penalties and offences under the Excise Tax Act are implemented in Part 2).

Specifically, the following administrative monetary penalties and criminal offences apply:

Administrative Monetary Penalties

  • For the use of ESS software, an administrative monetary penalty of $5,000 on the first infraction and $50,000 on any subsequent infraction.
  • For the possession or acquisition of ESS software, an administrative monetary penalty of $5,000 on the first infraction and $50,000 on any subsequent infraction, except where a person exercised due diligence.
  • For the manufacture, development, sale, possession for sale, offer for sale or otherwise making available of ESS software, an administrative monetary penalty of $10,000 on the first infraction and $100,000 on any subsequent infraction, except where a person exercised due diligence.

Criminal Offences

  • For the use, possession, acquisition, manufacture, development, sale, possession for sale, offer for sale or otherwise making available of ESS software:
    • on summary conviction, a fine of not less than $10,000 and not more than $500,000 or imprisonment for a term of not more than 2 years, or both; or
    • on conviction by indictment, a fine of not less than $50,000 and not more than $1,000,000 or imprisonment for a term of not more than 5 years, or both.

This measure comes into force on the later of January 1, 2014 and Royal Assent.

Part 1 (Other)

A.   Legislative Proposals Released July 25, 2012

The Income Tax Act is amended to implement draft legislative changes that were released for consultation on July 25, 2012. Most notably, these changes relate to:

  • the taxation of specified investment flow-through entities (SIFTs), real estate investment trusts (REITs) and publicly-traded corporations; and
  • proposals responding to the decision in Richard Lewin Re: The J.J. Herbert Family Trust #1 v. The Queen, 2011 TCC 476, which relates to withholding tax on payments from Canadian-resident trusts to non-resident beneficiaries.

B. Legislative Proposals Released December 21, 2012

The Income Tax Act is amended to implement a package of technical changes that were released for consultation on December 21, 2012. Most notably, these changes relate to:

  • the computation of adjusted taxable income for the purposes of the alternative minimum tax;
  • the prohibited investment and advantage rules for registered plans; and
  • a number of amendments to sections 55 and 88 related to comfort letters issued to taxpayers by the Department of Finance, along with a change to section 88 to ensure that a parent corporation cannot benefit from an inappropriate step-up in cost base on the winding-up of a subsidiary corporation.

C. Temporary Foreign Worker Program

In order to better administer and enforce the Temporary Foreign Worker Program, this measure clarifies that the Canada Revenue Agency is authorized to disclose taxpayer information to Employment and Social Development Canada.