Minister of Finance Bill Morneau tabled the 2019 Budget on 19 March 2019 (budget day). This article summarises some of the main tax takeaways.
The tax measures introduced in the budget should not affect most businesses. As a pre-election budget, the government appears to have shied away from tax measures that could receive negative backlash from the business community. In general, the government has instead settled for a smattering of tax integrity measures that combat specific planning strategies entered into by a limited number of (mostly institutional) taxpayers.
Two measures that involve transfer pricing are expected to increase compliance costs for many taxpayers with international activities. In particular, the government is proposing to codify the Canada Revenue Agency's (CRA's) position that the transfer pricing provisions contained in Part XVI.1 of the Income Tax Act can apply in conjunction with other provisions involved in the computation of Part I income. The government is also proposing to expand the foreign affiliate dumping rules to apply to Canada-resident corporations that are controlled by non-resident individuals or trusts.
The most significant international tax measure for most taxpayers is the interaction of Canada's transfer pricing rules in Part XVI.1 with other provisions in the act that are relevant to the computation of Part I tax, which can come into conflict in various scenarios.
For example, Section 17 can deem interest to be paid on amounts lent by Canadian resident corporations to non-residents, where the amounts are lent for no interest or less than reasonable interest. Due to this deeming rule, many taxpayers simply pay the prescribed rate of interest under Section 17 with no regard to Canada's transfer pricing rules. The basis for this position is reasonable: Section 17 is specific to the rate of interest that should be paid on certain debt, whereas the transfer pricing provisions apply more generally to any transaction involving non-arm's length non-residents.
The government is proposing to amend the act so that the transfer pricing rules in Part XVI.1 apply in priority to the application of other provisions. Therefore, in the above example, it appears that taxpayers will no longer be able to argue that the prescribed rate under Section 17 trumps the transfer pricing provisions. It appears that the proposed amendments are intended to ensure that taxpayers apply the transfer pricing provisions (including the requirement to obtain contemporaneous documentation) to all transactions involving non-arm's length non-residents, regardless of whether more specific provisions in the act could apply.
However, the measures will not apply to the existing exceptions to the application of the transfer pricing rules for amounts owed by or guarantees for amounts owed by, controlled foreign affiliates of Canadian resident corporations.
This measure will apply to taxation years that begin on or after budget day.
Transfer pricing reassessment period
The budget proposes to broaden Paragraph 152(4)(b)(iii) of the Income Tax Act so that the extended three-year reassessment period applies to all transactions involving a taxpayer and a non-resident with whom the taxpayer does not deal at arm's length.
As a result, the reassessment period for the minister to make a transfer pricing adjustment will be extended to six years (or seven years if the taxpayer is a mutual fund trust or a corporation other than a Canadian-controlled private corporation ).
This measure will apply to taxation years for which the normal reassessment period ends on or after budget day.
Under new proposed measures, joint and several liability for tax owing on income from carrying on a business in a tax-free savings account (TFSA) will be extended to the TFSA holder. Further, the existing joint and several liability of a TFSA's trustee at any time in respect of business income earned by the TFSA will be limited to the property held in the TFSA at that time plus the amount of all distributions of property from the TFSA on or after the date that a notice of assessment is sent.
Other international tax measures
The budget proposes additional international tax measures, which are briefly summarised as follows:
- The foreign affiliate dumping rules will be extended to apply to corporations resident in Canada (CRICs) that are controlled by non-resident individuals or trusts. Currently, the foreign affiliate dumping rules apply only to CRICs that are controlled by non-resident corporations (or by a related group of non-resident corporations). These changes are similar to other tax integrity measures contained in recent budgets, which have extended existing anti-avoidance regimes to additional types of entity. For example, Budget 2018 extended the cross-border surplus stripping rules in Section 212.1 of the Income Tax Act to account for transactions involving partnerships and trusts.
- Securities lending arrangements – new rules are proposed to target fairly complex planning that seeks to avoid Part XIII tax on dividend compensation payments payable by Canadian residents to non-residents under securities lending arrangements (SLAs) involving shares of Canadian issuers. The existing rules apply to SLAs that involve a non-resident lending a share to a Canadian resident and the Canadian resident agreeing to return an identical share to the non-resident in future. The non-resident retains the same economic exposure as if it had continued to hold the share because the Canadian resident must make dividend compensation payments as compensation for any dividends paid by the issuer of the lent share. In general, dividend compensation payments made under a fully collateralised SLA are treated as dividends for purposes of the non-resident withholding regime under Part XIII.
The new rules proposed in the budget intend to combat planning to avoid the rules that characterise the dividend compensation payments as dividend payments. First, all dividend compensation payments made under an SLA by a Canadian resident will be treated as a dividend, regardless of whether the SLA is fully collateralised. Second, the dividend characterisation rules will apply to a 'specified securities lending arrangement', which is more broadly defined than an SLA. Additional rules will address other unintended benefits that taxpayers can derive by using SLAs.
The budget includes proposals to prevent planning that circumvents various tax integrity measures in the Income Tax Act. These proposals apply to a fairly limited range of planning, and therefore have limited application outside certain institutional taxpayers that sell structured products.
Derivative forward agreements
The budget proposes amendments to the derivative forward agreement provisions so that certain investments, that would otherwise be exempt, are caught by the regime.
Effectively, the derivative forward agreement rules prevent taxpayers from converting what would otherwise be taxable income on a portfolio of investments into capital gains by entering into a forward purchase agreement for Canadian securities, the value of which was based on the performance of the reference portfolio. The budget attempts to enhance the integrity of these rules by preventing taxpayers from qualifying for the commercial transaction exception if one of the main purposes of the series of transactions, which includes entering into the agreement to purchase the securities, is to convert an amount paid on the security into a capital gain.
The budget provides modest tax incentives for specific areas. The following measure is particularly notable.
The budget delivers a temporary measure for businesses to deduct the cost of eligible zero-emission vehicles on a current basis. This measure will be implemented through a first-year capital cost allowance (CCA) rate of 100% for vehicles that fall into two new CCA classes:
- Class 54 for zero-emission vehicles that would otherwise be included in Class 10 or 10.1; and
- Class 55 for zero-emission vehicles that would otherwise be included in Class 16.
Among other things, vehicles will be eligible for the enhanced deduction only if they are:
- fully electric;
- a plug-in hybrid with a battery capacity of at least 15kWh; or
- fully powered by hydrogen.
This measure will apply to eligible zero-emission vehicles acquired on or after budget day that become available for use before 2028, subject to a phase out for vehicles that become available for use after 2023.
For further information on this topic please contact Tim Barrett at Thorsteinssons LLP by telephone (+1 604 689 1261) or email ([email protected]). The Thorsteinssons LLP website can be accessed at www.thor.ca.
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