Introduction
Business income tax measures
International tax measures
On March 21 2013 Minister of Finance James Flaherty tabled the Canadian government's 2013 Federal Budget. According to Budget 2013, the government remains on track to return to balanced budgets by 2015-2016, despite continued global economic uncertainty. While still continuing to focus on controlling direct programme spending by government departments, the government's priorities in Budget 2013 are to:
- connect Canadians with available jobs by equipping them with the skills and training to obtain high-quality, well-paying jobs;
- help manufacturers and businesses to succeed in the global economy by enhancing the conditions for creating and growing businesses;
- create a new infrastructure plan focused on projects that create jobs and economic growth; and
- invest in world-class research and innovation.
Budget 2013 proposes a number of significant business income tax and international tax measures. The government's intentions in introducing Budget 2013's measures are to improve the integrity of the tax system, close tax loopholes, strengthen compliance, clarify tax rules and combat international tax evasion and aggressive tax avoidance.
Corporate loss trading
The government has indicated that despite the various provisions meant to curtail the inappropriate trading of tax attributes between unrelated parties, transactions intended to circumvent these provisions continue to be undertaken. Existing provisions of the Income Tax Act allow the government to challenge such transactions, but the process is both time consuming and costly.
Budget 2013 proposes to introduce a new anti-avoidance rule to support existing restrictions on the trading of tax attributes, which generally apply on the acquisition of control of a corporation. This new measure will apply to deem an acquisition of control (and thus a triggering of the restrictions) to occur where a person or group of persons acquires shares of a corporation representing more than 75% of the fair market value of all shares of the corporation without otherwise acquiring voting control of the corporation. This anti-avoidance rule will apply only in circumstances where it is reasonable to conclude that one of the main purposes for not acquiring control of the corporation was to avoid existing restrictions on the trading of tax attributes. Additional measures are also proposed to ensure that this proposed anti-avoidance measure is not circumvented.
The government projects that the proposed measures will generate approximately C$95 million in tax revenue over a period of five years. Using a 15% federal corporate tax rate, this could affect the usage of approximately C$630 million in corporate losses.
This new anti-avoidance rule will apply in the case of shares of a corporation acquired after March 20 2013, unless such shares were acquired pursuant to an agreement in writing entered into before March 20 2013 under which the parties are obligated to complete the transaction. Parties will generally be considered not to be obligated to complete the transaction where a party may be excused from completing the transaction due to changes to the Income Tax Act.
Accelerated capital cost allowance
Manufacturing and processing machinery and equipment
Budget 2013 proposes to extend the temporary support for investment in machinery and equipment for the manufacturing and processing sector by an additional two years. Manufacturing and processing machinery and equipment (that would otherwise be included in Class 43) and that is acquired in 2014 or 2015 will qualify for the 50% straight-line capital cost allowance rate (subject to the half-year rule), and will be included in Class 29. Eligible assets acquired in 2016 and subsequent years will qualify for the regular 30% declining-balance rate (subject to the half-year rule), and will be included in Class 43.
Clean energy generation equipment
Budget 2013 proposes to expand 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, and specifically to include pulp and paper waste and wastewater, beverage industry waste and wastewater (eg, winery and distillery wastes) and separated organics from municipal waste.
Budget 2013 also proposes to expand eligibility under Class 43.2 so that all types of cleaning and upgrading equipment that can be used to treat eligible gases from waste will be included in Class 43.2. These measures will apply in respect of property acquired on or after March 21 2013 that has not been used or acquired for use before that date.
Scientific research and experimental development programme
More detailed information will be required to be provided on scientific research and experimental development programme claim forms about scientific research and experimental development programme tax preparers and billing arrangements, where one or more third parties have assisted with the preparation of a claim. Also proposed is a new penalty of C$1,000 in respect of each scientific research and experimental development programme claim for which the information about scientific research and experimental development programme tax preparers and billing arrangements is missing, incomplete or inaccurate. Where a third-party scientific research and experimental development programme tax preparer has been engaged, the scientific research and experimental development programme claimant and tax preparer will be jointly and severally, or solidarily, liable for the penalty. These changes will apply to scientific research and experimental development programme claims filed on or after the later of January 1 2014 and the date of royal assent to the enacting legislation.
Mining expenses
Pre-production mine development expenses
Pre-production mine development expenses are currently treated as Canadian exploration expense and may be deducted in full in the year incurred or carried forward indefinitely for use in future years. In contrast, intangible mine development expenses incurred after a mine comes into production are treated as Canadian development expense and are deductible at a rate of 30% a year on a declining-balance basis.
Budget 2013 proposes that pre-production mine development expenses, as described in Paragraph (g) of the definition of 'Canadian exploration expense' in Section 66.1(6) of the Income Tax Act, be treated as a Canadian development expense. The transition from Canadian exploration expense to Canadian development expense treatment will be phased in during 2015 to 2017, with pre-production mine development expenses being allocated proportionally to Canadian exploration expenses and Canadian development expenses according to a transitional schedule based on the calendar year in which the expense is incurred, with full phase-in after 2017. This measure will generally apply to expenses incurred on or after March 21 2013. The existing Canadian exploration expense treatment for pre-production mine development expenses will be maintained for expenses incurred before March 21 2013, and will also apply to expenses incurred before 2017 in specified circumstances.
Accelerated capital cost allowance
Most machinery, equipment and structures used to produce income from a mine or an oil or gas project are currently eligible for a capital cost allowance rate of 25% on a declining-balance basis. Accelerated capital cost allowance is provided for certain assets acquired for use in new mines or eligible mine expansions.
Budget 2013 proposes to phase out the additional allowance available for mining (other than for bituminous sands and oil shale, for which the phase-out will be complete in 2015). The additional allowance will be phased out over the 2017 to 2020 calendar years. A taxpayer will be allowed to claim a percentage of the amount of the additional allowance otherwise permitted under the existing rules according to a specific transitional schedule. This measure will generally apply to expenses incurred on or after March 21 2013. The existing additional allowance will be maintained for eligible assets acquired before March 21 2013, and will also apply for such assets acquired before 2018 in specified circumstances.
Reserve for future services
To clarify the tax treatment of amounts set aside to meet future reclamation obligations, Budget 2013 proposes to amend the Income Tax Act to ensure that the reserve for future services in Paragraph 20(1)(m) cannot be used by taxpayers with respect to amounts received for the purpose of funding future reclamation obligations. This measure will apply to amounts received on or after March 21 2013, other than amounts received that are directly attributable to future reclamation costs, that were authorised by a government or regulatory authority before that date and that are received:
- under a written agreement between the taxpayer and another party (other than a government or regulatory authority) that was entered into before March 21 2013 and not extended or renewed on or after that date; or
- before 2018.
Phase-out of deduction for credit unions
Budget 2013 proposes to phase out over five years the additional deduction for credit unions which provided them access to a preferential income tax rate for income not eligible for the small business deduction. The phase-out will begin in 2013, with full elimination for 2017 and subsequent years. This measure will apply to taxation years that end on or after March 21 2013, with proration for all taxation years during the phase-out period that do not coincide with the calendar year.
Taxation of corporate groups
In Budget 2013 the government announced that its examination of possible new rules for the taxation of corporate groups, which was first mentioned in Budget 2010, is now complete, and that it has determined that "moving to a formal system of corporate group taxation is not a priority at this time".
Thin capitalisation rules
Canada's thin capitalisation regime limits interest expense deductibility on debts owing by a Canadian corporation to some non-residents if the corporation's leverage exceeds a specified debt-to-equity ratio. This rule applies to debt owing to ''specified non-residents'' – non-residents who either are 25%-plus shareholders (by votes or value) of the corporation or who do not deal at arm's length with such 25%-plus shareholders. To the extent that the corporation owes money to specified non-residents in excess of one-and-a-half times its 'equity' (the sum of the corporation's total retained earnings plus the paid-up capital attributable to shares of the corporation owned by non-residents who are 25%-plus shareholders), the corporation cannot deduct interest on the excess debt. The 2012 federal budget extended these rules to partnerships of which a Canadian corporation is a member.
Canadian-resident trusts
Budget 2013 proposes to extend the thin capitalisation rules to apply to Canadian-resident trusts, with appropriate modifications of the existing rules. For example, a trust's equity for the purposes of the thin capitalisation rules will generally consist 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. An elective transitional rule allows equity to be computed based on the net fair market value of the trust's assets.
Where the interest expense of a trust is not deductible as a result of the application of the thin capitalisation rules, the trust will be entitled to designate the non-deductible interest as a payment of income of the trust to a non-resident beneficiary (ie, the recipient of the non-deductible interest). In such a case, the trust will be able to deduct the designated payment in computing its income, but the designated payment will be subject to non-resident withholding tax under Part XIII and potentially tax under Part XII.2 of the Income Tax Act, depending on the character of the income earned by the trust.
The thin capitalisation rules will also be extended to apply to partnerships in which a Canadian-resident trust is a member. Where these rules result in an amount being included in computing the income of a trust, the trust will be entitled to designate the included amount as having been paid to a non-resident beneficiary as income of the trust. These measures will apply to taxation years that begin after 2013 and will apply with respect to existing as well as new borrowings.
Non-resident corporations and trusts
Budget 2013 proposes to extend the thin capitalisation rules to non-resident corporations and trusts that carry on business in Canada (or elect to be taxed as a Canadian resident under Section 216 of the Income Tax Act). Since a Canadian branch does not have shareholders or equity for purposes of the thin capitalisation rules, the thin capitalisation rules for non-resident corporations and trusts will differ from the rules for Canadian-resident corporations in certain respects.
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 capitalisation 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. In addition, a debt-to-asset ratio of 3:5 will be used, which parallels the 1.5:1 debt-to-equity ratio used for Canadian-resident corporations. Where the non-resident is a corporation, the application of the thin capitalisation rules could increase its liability for branch tax under Part XIV of the Income Tax Act.
This proposal will also extend the thin capitalisation rules to apply to partnerships in which a non-resident corporation or trust is a member. Any income inclusion for a non-resident partner that arises as a consequence of the application of the thin capitalisation rules will be deemed to have the same character as the income against which the partnership's interest deduction is applied. These measures will apply to taxation years that begin after 2013 and will apply with respect to existing as well as new borrowings.
International tax evasion and aggressive tax avoidance
International electronic funds transfers
Budget 2013 proposes that the Income Tax Act, the Excise Tax Act and the Excise Act be amended to require that certain financial intermediaries report to the Canada Revenue Agency (CRA) international electronic fund transfers of C$10,000 or more. This requirement will apply to the same financial intermediaries that are currently required to report international electronic funds transfers to the Financial Transactions and Reports Analysis Centre of Canada under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, including banks, credit unions, caisses populaires, trust and loan companies, money services businesses and casinos. Reporting will be required beginning in 2015.
Stop International Tax Evasion Programme
Under this new programme, the CRA will pay rewards to individuals with knowledge of major international tax non-compliance when they provide information to the CRA that leads to the collection of outstanding taxes due. The CRA will enter into a contract that will pay an individual only if the information results in total additional assessments or reassessments exceeding C$100,000 in federal tax. Awards will be paid only where the non-compliant activity involves foreign property or property located or transferred outside Canada, or transactions conducted partially or entirely outside Canada. Any rewards paid under the programme will be subject to income tax.
Treaty shopping
In response to the government's lack of success in challenging treaty shopping cases in court and its concern that treaty shopping poses significant risks to the tax base, Budget 2013 announces the government's intention to consult on possible measures that would protect the integrity of Canada's tax treaties while preserving a business tax environment that is conducive to foreign investment. A consultation paper will be publicly released to provide stakeholders with an opportunity to comment on possible measures.
International banking centres
The international banking centre rules exempt prescribed financial institutions from tax on certain income earned through a branch or office in the metropolitan areas of Montreal and Vancouver. Budget 2013 proposes to repeal these rules for taxation years that begin on or after March 21 2013.
For further information on this topic please contact Stephen Fyfe, Steve Suarez or Stephanie Wong at Borden Ladner Gervais LLP's Toronto office by telephone (+1 416 367 6000), fax (+1 416 367 6749) or email ([email protected], [email protected] or [email protected]). Alternatively, contact Jean-Philippe Couture at Borden Ladner Gervais LLP's Calgary office by telephone (+1 403 232 9500), fax (+1 403 266 1395) or email ([email protected])
