The federal budget (Budget 2016) tabled on March 22 (Budget Day) contains a number of proposed amendments to Canada’s Income Tax Act (the Tax Act) as well as Part IX of Canada’s Excise Tax Act (the GST Legislation). This bulletin focuses on (i) business income tax measures, (ii) international tax measures, (iii) GST/HST measures, (iv) other proposed tax measures, and (v) the status of outstanding tax measures.
Business Income Tax Measures
Small Business Taxation
1. Tax Rate
A corporation that is a Canadian-controlled private corporation (CCPC) throughout its taxation year is entitled to a small business deduction (SBD) that effectively results in its first $500,000 of active business income (ABI) being subject to federal tax at 10.5%. The 2015 federal budget (Budget 2015) previously proposed to provide for gradual reductions in the small business tax rate for 2017, 2018, 2019 and subsequent years. Budget 2016 proposes that the small business tax rate remain at 10.5% after 2016. Consequential to keeping the small business tax rate at 10.5%, Budget 2016 also proposes to maintain the current gross-up factor and dividend tax credit rate applicable to non-eligible dividends.
2. Multiplication of the SBD
There are various provisions in the Tax Act that are intended to preclude the multiplication of access to the SBD. Budget 2016 proposes measures that target certain partnership and corporate structures that multiply access to the small business limit.
The specified partnership income (SPI) rules in the Tax Act are intended to prevent such multiplication by applying a single business limit in respect of the business of a partnership of corporations. This prevents each CCPC that is a member of the partnership from claiming a separate SBD up to $500,000 in respect of the partnership income allocated to it. Generally, for a CCPC that is a member of a partnership, the SBD that such CCPC can claim in respect of its partnership income is limited to the lesser of the CCPC’s share of the ABI and its pro rata share of a notional $500,000 business limit at the partnership level. The CCPC’s SPI is then added to its ABI from other sources to determine the total amount of SBD the CCPC can claim.
Under the current regime, taxpayers have used certain planning structures to ensure they do not fall within the SPI rules. Budget 2016 describes a typical structure whereby a shareholder of a CCPC is a member of a partnership and the CCPC provides services to the partnership for a fee. This allows the CCPC to claim the full SBD in respect of its ABI earned from providing these services because the CCPC is not itself a member of the partnership.
To address such tax planning, Budget 2016 proposes to extend the SPI rules discussed above to a situation where a CCPC provides services or property to a partnership where, at any time during the taxation year of the CCPC, the CCPC or a shareholder of the CCPC is a member of the partnership or does not deal at arm’s length with a member of the partnership. To achieve this, Budget 2016 proposes that for the purposes of the SPI rules, a CCPC is generally considered to be a designated member of a partnership throughout a taxation year if: (1) it is not otherwise a member of the partnership during the year; (2) it provides services or property to the partnership at any time during the year; (3) a member of the partnership does not deal at arm’s length with the CCPC (or a shareholder of the CCPC) in the year; and (4) it is not the case that all or substantially all of the CCPC’s ABI for the year is from providing services or property to arm’s length persons other than the partnership.
A CCPC that is designated a member of a partnership will include in its SPI the ABI from providing such services or property.
Budget 2016 proposes that the SPI of a designated member eligible for the SBD will be nil unless an actual member of a partnership notionally assigns the designated member all or a portion of such actual member’s "specified partnership business limit."
This measure will apply to taxation years that begin on or after Budget Day.
Similar to the situation described above, Budget 2016 describes a tax planning method to multiply access to the SBD whereby a CCPC earns ABI from providing services or property to a private corporation during the CCPC’s taxation year and the CCPC (or one of its shareholders or a person non-arm’s length with such shareholder) has a direct or indirect interest in the private corporation.
Pursuant to Budget 2016, a CCPC’s ABI from providing services or property in its taxation year to a private corporation will not be eligible for the SBD except to the extent of the unused business limit that is assigned by another CCPC to which the CCPC provided such services or property.
Such proposed rules permitting the assignment of all or a portion of the unused business limit are analogous to those in respect of SPI.
This measure will apply to taxation years that begin on or after Budget Day. CCPCs will generally be entitled to assign their unused business limit as described above in respect of their taxation year that begins before and ends on or after Budget Day.
3. Avoidance of Business Limit and Taxable Capital Limit
Under the Tax Act, associated corporations are generally required to share the SBD and investment income earned by a CCPC that is deductible in computing the ABI from an associated CCPC is deemed to be ABI of the CCPC. Where two CCPCs are not otherwise associated but are each associated with a third corporation, the two CCPCs are generally deemed to be associated except for purposes of the SBD, where the third corporation is not a CCPC or if an election is made. According to Canada’s Department of Finance (Finance), certain CCPCs are currently misusing the election to multiply their SBD and are being challenged by a specific anti-avoidance rule or under the general anti-avoidance rule. However, any such challenge could be time-consuming and costly.
Budget 2016 proposes amendments to ensure a CCPC’s investment income described in these circumstances will be ineligible for the SBD and taxed at the general corporate rate. In addition, the third corporation will continue to be associated with the other two corporations for purposes of the $15M taxable capital limit in relation to the SBD.
This measure will apply to taxation years beginning on or after Budget Day.
4. Consultation on Active Versus Investment Business
Under the Tax Act, ABI does not include income from a business the principal purpose of which is to derive income from property. Generally, such property income is not eligible for the SBD unless the business has more than five full-time employees. Budget 2015 announced a review of the circumstances in which income from a business, the principal purpose of which is to earn income from property, should qualify as ABI eligible for the SBD. The consultation period ended August 31, 2015.
Budget 2016 announced that the examination of the active versus investment business rules is now complete and there are no proposed modifications to these rules at this time.
Eligible Capital Property
To reduce the compliance burden, the 2014 federal budget announced a public consultation on a proposal to repeal the eligible capital property (ECP) regime and replace it with a new class of property to which the capital cost allowance (CCA) rules would apply. Budget 2016 proposes to repeal the ECP regime and replace it with new Class 14.1 (Class 14.1) and provides for certain transitional rules. The proposals provide that property, expenditures and receipts that were accounted for under the ECP rules will instead be accounted for under the depreciable property and capital property rules.
Pursuant to Budget 2016, the cost of property acquired on or after January 1, 2017 that would otherwise be added to cumulative eligible capital (CEC) at a 75% inclusion rate, will be added to Class 14.1 at a 100% inclusion rate. Class 14.1 also generally includes goodwill and property that was ECP before January 1, 2017. The CCA depreciation rate for this new class will be 5% on a declining balance basis (instead of at the current rate of 7%). The existing CCA rules will generally apply to Class 14.1, including rules relating to recapture, capital gains and depreciation. For example, the half-year rule (allowing only half of the CCA deduction otherwise available in respect of a property in the year in which the property was acquired or first became available for use) will apply.
Eligible capital expenditures and receipts that relate to acquisitions or dispositions of a property will result in adjustments to the undepreciated capital cost (UCC) balance of Class 14.1. For goodwill and other expenditures and receipts that do not relate to a property but that would increase CEC under the ECP regime, special rules will apply. An expenditure not relating to a property will result in an increase in the capital cost of the goodwill of the business and a consequential increase in the UCC of Class 14.1. A receipt not relating to a property will result in a decrease in the capital cost of the goodwill of the business and a consequential decrease in the UCC of Class 14.1 by the lesser of the capital cost of the goodwill (which may be nil) and the amount of the receipt. The rules relating to recapture and capital gains will also apply to goodwill.
Budget 2016 also provides for certain transitional rules including the following:
- The CEC balance in respect of a business will be calculated as of January 1, 2017 and will generally be transferred to the UCC balance of Class 14.1 in respect of the business as of that date.
- For taxation years ending before 2027, Class 14.1 will have a depreciation rate of 7% in respect of expenditures incurred before January 1, 2017 (to account for the 75% inclusion rate).
- Certain special rules are proposed in order to simplify the transition for small CEC balances.
This measure, including any transitional rules, will apply as of January 1, 2017.
Taxation of Switch Fund Shares
Changes to the rules relating to mutual fund classes will eliminate the tax advantaged ability of investors to switch between classes of mutual fund corporations with different investment mandates after September 2016. Investors in particular classes that switch after that date will face a taxable disposition for switches.
Mutual funds are commonly structured as "mutual fund trusts" or classes of shares of a "mutual fund corporation" under the Tax Act. A "mutual fund trust" can have only one investment mandate whereas each class of shares of a mutual fund corporation can have a separate investment mandate which tracks a separate pool of investments (commonly referred to as a "switch fund"). A taxable investor in a mutual fund trust is not able to switch between investment mandates without experiencing a taxable disposition of the investor’s units. A taxable investor in a "switch fund" is able to switch between classes of shares of the mutual fund corporation and therefore investment mandates on a tax-deferred basis by relying on section 51 of the Tax Act.
"To ensure the appropriate recognition of capital gains," Budget 2016 proposes that switches between shares of classes of a mutual fund corporation (or investment corporation) will be treated as a disposition of those shares at their fair market value. Consistent with the treatment of switches between series of units of a mutual fund trust, Budget 2016 states that such measures will not affect switches between series of shares of the same class of the mutual fund corporation (or investment corporation) where the only difference between the series relates to management fees or expenses to be borne by investors. Implementing legislation to address this measure was not included in the Notice of Ways and Means Motion so it is unclear whether it will have impact on any of the other provisions of the Tax Act that may provide for a tax-deferred exchange of mutual fund corporation (or investment corporation) shares other than section 51. This measure will apply to dispositions of shares that occur after September 2016.
Sales of Linked Notes
A linked note is a debt obligation, the return on which is linked to the performance of one or more reference assets or indexes. Generally, such return is taxed as interest if the note is held until maturity. However, certain investors treat any gain on a disposition of the notes prior to maturity as a capital gain. Issuers often facilitate this planning by establishing an affiliate to which investors dispose of such notes prior to maturity. Budget 2016 proposes amendments to deem any gain realized on the sale of a linked note to be accrued interest on the debt obligation. Foreign currency fluctuations will be ignored for purposes of calculating the gain subject to the deeming rule. Where a portion of the return on a linked note is based on a fixed rate of interest, any portion of the gain that is reasonably attributable to market interest rate fluctuations will also be excluded.
This measure will apply to sales of linked notes that occur after September 2016.
Valuation for Derivatives
In computing a taxpayer’s income from a business, the Tax Act permits a taxpayer to value property that is inventory at the lower of its cost and fair market value (FMV). Thus, by virtue of this valuation method, the taxpayer is entitled to deduct unrealized losses on such property (i.e., the amount by which the FMV at the end of the year is less than the cost at the beginning of the year) while only having to recognize gains when actually realized (i.e., when the property is ultimately disposed).
Finance considers that, while the lower of cost and market (LCM) method is appropriate for "conventional" inventory such as tangible goods held for sale, it is not appropriate for derivative contracts that otherwise meet the definition of inventory under the Tax Act. In this regard, Finance notes a recent Tax Court of Canada decision (Kruger Incorporated v. R., 2015 TCC 119 (Kruger)) in which the Court held that foreign exchange option contracts purchased by a taxpayer (that was not a financial institution) constituted inventory of the taxpayer, and thus could be valued in accordance with the methods set out under the Tax Act (and the Income Tax Regulations), as noted above, including the LCM method. As an aside, financial institutions are required to mark-to-market certain types of derivatives, thus having to recognize both unrealized gains and losses in computing their income. The foreign exchange options in Kruger were not "mark-to-market property" and, in any event, the taxpayer was not a financial institution.
Finance is concerned that, where derivatives are considered inventory of a taxpayer, the application of the LCM method could lead to significant deductions of unrealized losses in computing the business income of all such relevant taxpayers, especially given their potential higher volatility and longer holding periods as compared to conventional inventory.
As such, Budget 2016 proposes that swaps, forward purchase or sale agreements, forward rate agreements, futures, options or any similar agreements would be deemed not to be inventory solely for purposes of the inventory valuation rules. Budget 2016 also proposes a new rule to prohibit a deduction in computing a taxpayer’s income from a business or property under general profit computation principles in respect of any unrealized losses (i.e., reduction in the value) of any of the foregoing types of derivatives using the LCM method.
Both measures will apply to agreements entered into on or after Budget Day.
Debt Parking to Avoid Foreign Exchange Gains
Generally, the Tax Act requires that all amounts be reported in Canadian dollars. As a result, taxpayers can realize foreign exchange gains or losses for tax purposes arising from the fluctuation of the Canadian dollar relative to other currencies.
Taxpayers normally realize foreign exchange gains or losses sustained on foreign currency debt for tax purposes when the debt is settled. This led to various planning techniques where a non-arm’s length party would acquire the foreign currency-denominated debt of a taxpayer, instead of the taxpayer settling this debt directly. The new creditor and the debtor would simply let the debt remain outstanding. The debt became a "parked" obligation, but no foreign currency gain needed to be reported since the debt was not settled.
Where applicable, the debt forgiveness rules deem a parked debt to be repaid for an amount equal to its cost to the new creditor. The difference between this amount and the principal of the debt is applied to reduce the tax attributes of the debtor, and half of any remaining amount is added to the debtor’s income. However, any accrued foreign exchange gain or loss of a debtor is not realized under the debt parking rules. These rules deem a foreign currency debt to be settled for purposes of the debt forgiveness rules when acquired by the new creditor, but any foreign exchange gain realized on the debt at that time is not taken into account.
Budget 2016 states that debt parking transactions can be challenged under the general anti-avoidance rule in the Tax Act. However, any such challenge could be both time-consuming and costly. To ensure the appropriate tax consequences apply, Budget 2016 proposes to introduce specific rules so that any foreign exchange gains on a foreign currency debt will be realized when the debt becomes a parked obligation. Under such proposed rules, the debtor will be deemed to have realized the gain, if any, that it otherwise would have realized if it had paid an amount (expressed in the currency of the debt) in satisfaction of the principal amount of the debt equal to: (1) where the debt becomes a parked debt as a result of its acquisition by the current holder, the amount for which the debt was acquired; and (2) in any other case, the fair market value of the debt.
Certain bona fide commercial transactions will be excepted from the application of the new rules and related rules will provide relief to financially distressed debtors.
This measure will generally apply to a foreign currency debt that meets the conditions to become a parked debt on or after Budget Day.
Back-to-Back Loan Rules: Shareholder Loans
Budget 2016 proposes to add back-to-back loan rules to the shareholder loan rules. It is proposed that the new back-to-back loan rules will be similar to the existing back-to-back loan rules in Part XIII of the Tax Act. If the proposed rules apply in respect of debt owing by the shareholder of a Canadian-resident corporation, the shareholder will be deemed to be indebted directly to the corporation.
This measure will apply to back-to-back shareholder loan arrangements as of Budget Day. For back-to-back shareholder loan arrangements that are in place on Budget Day, the deemed debt will be deemed to have become owing on Budget Day.
Mineral Exploration Tax Credit for Flow-Through Share Investors
Budget 2016 has offered what has become the traditional one-year extension to the investment tax credit regime for flow-through shares in the mining sector. Consequently, eligible expenses will continue to qualify for a 15% investment tax credit for agreements entered into on or before March 31, 2017.
Electrical Energy Storage
Under the current CCA rules, only certain electrical energy storage equipment is eligible for accelerated CCA treatment when it is ancillary to electricity generation technologies eligible for inclusion in Class 43.1 or Class 43.2. Such treatment depends on the technology used for electricity generation. Stand-alone electrical energy storage equipment does not qualify for inclusion in either Class 43.1 or Class 43.2 and is generally included in Class 8 which provides for a CCA rate of 20% on a declining-balance basis.
Budget 2016 proposes to clarify and expand the range of electrical energy storage property that is eligible for accelerated CCA to include a broad range of short- and long-term storage equipment. Budget 2016 also proposes to allow stand-alone electrical energy storage property that has a round trip efficiency of greater than 50% to be included in Class 43.1.
For both proposed changes, eligible electrical energy storage property will include, for example, batteries, flywheels and compressed air energy storage along with any ancillary equipment and structures. However, eligible electrical energy storage property will not include pumped hydroelectric storage, hydroelectric dams and reservoirs, or fuel cell systems where the hydrogen is produced via steam reformation of methane. Certain uses of electrical energy storage equipment will also be excluded from eligibility for inclusion in either Class 43.1 or Class 43.2.
This measure will apply in respect of property acquired for use on or after Budget Day and that has not been used or acquired for use before Budget Day.
Emissions Trading Regimes
Under emissions trading regimes, regulated emitters are required to deliver emissions allowances to the government. Emitters can obtain these allowances by purchasing them in the market or at auction, earning them through reduction activities or from the government at low or no cost. Currently, the taxation of emissions trading regimes is determined under general tax principles as there are no specific tax rules to deal with such transactions. Budget 2016 proposes to introduce specific rules to provide clarity with respect to the tax treatment of emissions allowances and eliminate double taxation with respect to free allowances.
The proposals provide that emissions allowances be treated as inventory. However the LCM valuation method will not be available. There will be no income inclusion for a regulated emitter upon the receipt of a free allowance. A deduction will be available in respect of an accrued emissions obligation only to the extent that the obligation exceeds the taxpayer’s cost of any allowance that can be used to settle the obligation. Where a deduction is claimed in respect of an obligation that accrues in one year but it is not satisfied until a future year, the amount of the deduction will be brought into income in the future year, and the deductibility of the obligation will have to be evaluated again each year, until the obligation is satisfied. The taxpayer will have an income inclusion where an emissions allowance is disposed of otherwise than in satisfaction of an obligation under the emissions allowance regime to the extent that any proceeds received on the disposition exceed the taxpayer’s cost of the allowance.
This measure will apply to emissions allowances acquired in taxations years beginning after 2016 and, on an elective basis, to emissions allowances acquired in taxation years ending after 2012.
International Tax Measures
Base Erosion and Profit Shifting
The Organisation for Economic Co-operation and Development (OECD) released final reports on its base erosion and profit shifting (BEPS) initiative on October 5, 2015. Budget 2016 includes proposals to act on certain of the recommendations of the OECD.
1. Country-by-Country Reporting
Budget 2016 proposes to implement country-by-country reporting by multinational enterprises (MNE) having total annual consolidated group revenue of €750 million or more. Reporting will be required by such MNEs who have an ultimate parent resident in Canada. Reporting will also be required in certain circumstances by a Canadian resident subsidiary in situations where the MNE is required to appoint a subsidiary to be a "surrogate" for filing purposes and the Canadian subsidiary is so appointed. Draft legislative proposals are expected to be released for comment in the coming months. Country-by-country reports will be required to be filed with the Canada Revenue Agency for taxation years that begin after 2015, with first exchanges between jurisdictions expected to occur by June 2018.
2. Treaty Abuse
The BEPS treaty abuse minimum standard requires countries to adopt one of two approaches in their tax treaties: a principal purpose test or a limitation on benefits rule. Budget 2016 confirms the government’s intention to amend Canada’s tax treaties in accordance with the minimum standard and states that this may be accomplished through bilateral negotiations, a multilateral instrument to be developed in 2016, or a combination of both. No domestic legislation on treaty shopping abuse was proposed or discussed in Budget 2016.
3. Spontaneous Exchange of Tax Rulings
Budget 2016 proposes to implement the OECD minimum standard for the spontaneous exchange of certain tax rulings with other jurisdictions that have also committed to the OECD minimum standard. Such exchanges will commence in 2016.
4. Revised Transfer Pricing Guidance
The recommendations from the BEPS initiative include revisions to the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Budget 2016 states that these revisions are consistent with current practice and as such are being applied by the Canada Revenue Agency, with the exception of two areas (simplified approach to low value-adding services and definition of risk-free and risk-adjusted returns for minimally functional entities) where work by the BEPS project participants is ongoing. Canada will decide on an accepted approach in these two areas when the BEPS work is completed.
Cross-Border Surplus Stripping
The anti-surplus stripping rule in section 212.1 of the Tax Act is intended to prevent a non-resident person from extracting the retained earnings (or surplus) from a Canadian corporation in excess of the "paid-up capital" (PUC) of its shares on a tax-free basis or from artificially increasing the PUC of the Canadian corporation’s shares. In particular, subsection 212.1(1) applies where a non-resident person disposes of shares of a Canadian resident corporation (the subject corporation) to another Canadian resident corporation (the Canadian corporation) with which the non-resident person does not deal at arm’s length and immediately after the disposition the subject corporation is "connected" with the Canadian corporation. In general, the subject corporation will be connected with the Canadian corporation where the Canadian corporation owns more than 10% of the shares of the subject corporation on a votes and value basis. Where applicable, subsection 212.1(1) results in a deemed dividend paid to the non-resident person or the suppression of the PUC of the Canadian corporation’s shares that otherwise would have increased as a result of the transaction.
Subsection 212.1(4) provides an exception to the application of subsection 212.1(1) in circumstances where a non-resident corporation disposes of shares of a subject corporation to a Canadian corporation that immediately before the disposition controlled the non-resident corporation. This exception is intended to apply where the non-resident corporation is "sandwiched" between two Canadian corporations and the non-resident corporation disposes of shares of the lower-tier Canadian corporation to the Canadian corporation to eliminate the sandwich.
Budget 2016 proposes to amend subsection 212.1(4) to ensure that the exception applies as intended. In particular, it will be clarified that the exception does not apply where, at the time of the disposition, or as part of a transaction or event, or a series of transactions or events that includes the disposition, a non-resident person both (a) owns, directly or indirectly, shares of the Canadian corporation, and (b) does not deal at arm’s length with the Canadian corporation. Further, Budget 2016 proposes to add a clarifying rule that will deem the non-resident person to receive non-share consideration from the Canadian corporation for the subject shares for purposes of the anti-surplus stripping rule where the non-resident person otherwise would not be considered to have received any consideration. Such deemed consideration will be determined by reference to the fair market value of the shares of the subject corporation received by the Canadian corporation.
This measure will apply to dispositions occurring on or after Budget Day.
Extension of the Back-to-Back Rules
1. Back-to-Back Rules for Rents, Royalties and Similar Payments
Budget 2016 proposes to extend the existing back-to-back loan rules in Part XIII to rents, royalties and similar payments (royalties). Where the proposed rules apply, they will deem the Canadian-resident payor to have paid a royalty directly to the ultimate non-resident recipient rather than to the intermediary. An amount of withholding tax equal to the amount of withholding tax otherwise avoided as a result of the back-to-back arrangement will become payable on the deemed royalty payment.
A back-to-back arrangement will be considered to exist where a Canadian-resident person makes a royalty payment in respect of a particular lease, license or similar agreement (the Canadian leg) to an intermediary that is resident in a treaty country, and the intermediary, or a person or partnership that does not deal at arm’s length with the intermediary, has an obligation to pay an amount to another non-resident person in respect of a lease, license or similar agreement, or of an assignment or instalment sale (the second leg), if one of the following conditions is met:
- the amount the intermediary is obligated to pay is established, in whole or in part, by reference to (a) the royalty payment made by the Canadian-resident or (b) the FMV of property, any revenue, profits, income or cash flow from property, or any other similar criteria, where a right to use the property is granted under the Canadian leg; or
- it can reasonably by concluded that the Canadian leg was entered into or permitted to remain in effect because the second leg was, or was anticipated to be, entered into.
This measure will apply to royalty payments made after 2016.
2. Character Substitution Rules
Budget 2016 proposes to extend the back-to-back rules in Part XIII to back-to-back arrangements where the payments made in each leg have a different legal character but are economically similar. Such a back-to-back arrangement may exist where:
- interest is paid under one leg and royalties are paid under the other leg; or
- interest or royalties are paid by the Canadian-resident to the intermediary and a non-resident person holds shares of the intermediary that include certain features, such as an obligation to pay dividends.
Where the proposed rule applies, an additional payment of the same character as that paid by the Canadian-resident to the intermediary will be deemed to have been made directly by the Canadian-resident to the other non-resident person.
This measure will apply to interest and royalty payments made after 2016.
3. Multiple-Intermediary Structures
Budget 2016 proposes rules to address back-to-back arrangements with more than one intermediary. The new rules are proposed to apply to the existing and proposed back-to-back loan rules in Part XIII as well as to the proposed back-to-back shareholder loan rules.
This measure will apply to payments of interest and royalties made after 2016 and to shareholder debts as of January 1, 2017.
Budget 2016 proposes a number of amendments to the GST Legislation, including amendments to (a) the zero-rating rules for certain exported supplies of call centre services, (b) the rules concerning Goods and Services Tax/Harmonized Sales Tax (GST/HST) on donations to charities, (c) the rules concerning imported reinsurance services, and (d) the "closely related test" for purposes of certain GST/HST relieving elections. Each of these measures is discussed below.
Exported Call Centre Services
Under the GST Legislation, services supplied by a Canadian supplier to a non-resident recipient are generally not subject to GST/HST on the basis that such exported services are zero-rated.
Budget 2016 proposes to modify the zero-rating of supplies of exported call centre services so that such services are zero-rated in only certain circumstances. In particular, Budget 2016 proposes that the supply of a service of rendering to individuals technical or customer support by means of telecommunications will generally be zero-rated if the service is supplied to a non-resident person that is not registered for GST/HST purposes and it can reasonably be expected at the time the supply is made that the technical or customer support is to be rendered primarily to individuals who are outside Canada at the time the service is rendered to those individuals.
This measure will apply to supplies made after Budget Day and to supplies made on or before Budget Day in cases where the supplier did not, on or before that day, charge, collect or remit the GST/HST in respect of the supply.
Donations to Charities
Under the GST Legislation, GST/HST may apply to charitable donations made by a donor if the donor receives any property or services in exchange for the donation. Where the GST/HST is applicable, it applies to the full amount of the donation even if the amount of the donation exceeds the value of the property or services received by the donor in exchange.
Budget 2016 proposes that when a charity supplies property or services in exchange for a donation in circumstances where a charitable receipt may be issued for a portion of the donation under the Tax Act, only the value of the property or services supplied will be subject to GST/HST.
This measure will apply to supplies made after Budget Day. In addition, transitional relief will be provided for charities that did not properly collect and remit the GST/HST in respect of donations made between December 21, 2002 and Budget Day.
The GST Legislation contains special rules that require financial institutions (including insurers) that have a presence outside Canada to self-assess GST/HST on certain expenses incurred outside Canada that relate to their Canadian activities.
Budget 2016 proposes to clarify that two specific components of imported reinsurance services, ceding commissions and the margin for risk transfer, do not form part of the tax base that is subject to the self-assessment provisions for financial institutions and to set out specific conditions applicable to this measure.
This measure will generally apply as of the introduction of the special GST/HST imported supply rules for financial institutions. In addition, financial institutions will have until the day that is one year after this measure receives Royal Assent to request a reassessment of tax that was previously self-assessed under these rules to take into account this measure.
Closely Related Test
The GST Legislation contains relieving rules that allow members of a closely related group of corporations or partnerships to eliminate the need to charge GST/HST on certain intercompany supplies between them. To qualify for these relieving rules, among other things, each member of the group must be considered to be closely related to each other member of the group—the "closely related test."
Budget 2016 proposes an amendment to the closely related test to ensure that the test will only be met where nearly complete voting control exists. In particular, Budget 2016 proposes that, in addition to meeting the current requirements, a corporation or partnership must also hold and control 90 per cent or more of the votes in respect of every corporate matter of the relevant subsidiary corporation (with limited exceptions) to be closely related.
This measure will generally apply as of the day that is one year after Budget Day. However, the measure will apply as of the day after Budget Day for the purposes of determining whether the closely related test is met in respect of elections under sections 150 and 156 of the GST Legislation that are filed after Budget Day and that are to be effective as of any day that is after Budget Day.
Other Proposed Tax Measures
Additional noteworthy tax measures introduced by Budget 2016 include
- Consequential amendments to account for the top marginal individual income tax rate;
- Amendments to the rules relating to distributions involving life insurance proceeds and transfers of life insurance policies; and
- Restoration of a 15% tax credit for purchases of shares of Labour-Sponsored Venture Capital Corporations.
Status of Outstanding Tax Measures
Budget 2016 confirms the government’s intention to proceed with certain tax and related measures (as modified to take into account consultations and deliberations since their announcement or release) that were originally proposed in previous budgets or during the last Parliament but have yet to be legislated, including the following:
- "synthetic equity arrangements" under the dividend rental arrangement rules;
- the conversion of capital gains into tax-deductible inter-corporate dividends;
- the offshore reinsurance of Canadian risks;
- an exception to the withholding tax requirements for payments by qualifying non-resident employers to qualifying non-resident employees; and
- the acquisition or holding of limited partnership interests by registered charities.
In addition, Budget 2016 confirms the government’s intention to proceed with the following tax and related measures that were announced in the current session of Parliament but have yet to be legislated:
- the common reporting standard established by the OECD for the automatic exchange of financial account information between tax authorities; and
- legislative proposals for certain trusts and their beneficiaries.
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