Below are highlights of the proposed tax measures introduced in the 2014 federal budget delivered by Finance Minister Jim Flaherty on February 11, 2014.
Measures concerning individuals
Personal Income Tax Rates
No proposed changes to the progressive personal income tax rates of 15%, 22%, 26% and 29%.
Taxation of Estates and Testamentary Trusts
The 2014 budget proposes to generally proceed with the measures described in the June 2013 consultation paper. Flat top-rate taxation will apply to grandfathered inter vivos trusts and testamentary trusts for 2016 and subsequent taxation years. Exceptions will exist for the first 36 months of an estate that is a testamentary trust. Another exception is for testamentary trusts created for the benefit of disabled individuals who are eligible for the federal Disability Tax Credit.
Testamentary trusts that do not already have a calendar year end will have a deemed taxation year end on December 31, 2015 (or in the case of an estate for which that 36-month period ends after 2015, the day on which that period ends). Additionally, testamentary trusts (other than estates for their first 36 months) and grandfather inter vivos trusts will not benefit from special treatment under a number of related tax rules, including the basic exemption in computing alternative minimum tax and the exemption from the income tax instalment rules.
The budget proposes to extend the scope of kiddie tax by amending the definition of “split income” to include income that is, directly or indirectly, paid or allocated to a minor from a trust or partnership if it is derived from a business or rental property, and a person related to the minor is actively engaged on a regular basis in the activities or, in the case of a partnership, has a direct or indirect interest in it. This change will apply to the 2014 and subsequent taxation years.
The 60-month exemption from the deemed residence rules will be eliminated for taxation years that end after 2014 if no contributions are made to existing trusts on or after February 11, 2014 and before 2015, or taxation years that end on or after February 11, 2014 in any other case.
Adoption Expense Tax Credit
The budget proposes to increase the maximum amount of eligible adoption expenses from $11,774 to $15,000 per child for 2014 and to index that amount to inflation for taxation years after 2014. The tax credit will be computed based on the lowest personal income tax rate of 15%.
Charitable Donation by an Estate
Presently, a charitable donation made by will is deemed to have been made immediately prior to the individual’s death and can only be applied to reduce the income tax of the individual. Similarly, a donation made by the estate can only be applied against the income tax of the estate. The budget proposes to eliminate the deemed donation immediately before the individual’s death. Instead, the donation will be deemed to be made by the estate, and trustees will have the flexibility to allocate the available donation to the taxation year of the estate in which the donation is made, a prior taxation year of the estate or the last 2 taxation years of the individual. These rules will apply to donations made by an estate in its first 36 months, starting in 2016.
Ecological Sensitive Land Donations
The budget proposes to extend the carry-forward period for donations of ecologically sensitive land from 5 to 10 years, applicable to donations made on or after February 11, 2014.
Certified Cultural Property Donations
Existing rules limiting the amount of a charitable donation tax credit or deduction to the cost of the property to the donor, where the donor acquired the property as part of a tax shelter gifting arrangement, will be extended to gifts of certified cultural property made on or after February 11, 2014.
Medical Expense Tax Credit
The budget proposes to expand the eligible medical expenses to include amounts paid for the design of an individualized therapy plan for a person who is eligible for the Disability Tax Credit if the cost of the therapy itself would be eligible for the medical expense tax credit. As well, expenses incurred for service animals specifically trained to assist individuals with severe diabetes will be added as eligible expenditures under this credit. These changes will be applicable for expenses incurred after 2013. The tax credit will be computed based on the lowest personal income tax rate of 15%.
Search and Rescue Volunteers Tax Credit
Search and rescue volunteers who perform at least 200 hours of service in a taxation year will become eligible for a new 15% non-refundable tax credit based on an amount of $3,000.
Mineral Exploration Credit
The mineral exploration tax credit, equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors, will be extended for one year to flow-through share agreements entered into on or before March 31, 2015.
Pension Transfer Limits
For members leaving a RPP that is underfunded, existing rules compute the amount that can be transferred on a tax-free basis to an RRSP or certain other registered plans as if the plan were fully funded, provided certain conditions are met. The budget proposes to expand the scope of this relieving provision for certain commutation payments made after 2012.
Amateur Athlete Trust
The budget proposes to include income that is contributed to an amateur athlete trust after 2013 in the calculation of earned income for purposes of determining the beneficiary’s RRSP contribution limit. Additionally, income contributed in 2011, 2012, or 2013 will qualify as earned income, provided that an election is submitted in writing on or before March 2, 2015.
Farming and Fishing Businesses
The budget proposes to amend the rules related to property qualifying for the intergenerational rollover and the lifetime capital gains exemption. In addition, the budget adds bees and horses to the definition of breeding livestock that qualifies for tax deferral on disposition. These measures will apply to the 2014 and subsequent taxation years.
GST/HST Credit Administration
The budget proposes to allow the CRA to automatically determine if an individual is eligible to receive the GST/HST credit, without requiring the individual to apply for the credit when filing his/her tax return.
Measures Concerning Business
Corporate Tax Rates
No proposed changes to the corporate income tax rates or to the $500,000 small business income limit of a Canadian-controlled private corporation (CCPC). Hence, the 2014 federal general corporate rate and small-business rate remain at 15% and 11% respectively.
Employer Source Deduction Remittances
The budget proposes to reduce the frequency of remittance of source deductions for small businesses by increasing the threshold level of average monthly withholdings (see below) at which employers are required to remit up to two or four times per month:
Remittance Frequency Average Monthly Withholdings
Two times per month > $25,000 (up from $15,000)
Four times per month > $100,000 (up from $50,000)
This measure will apply to amounts to be withheld after 2014.
Consultation on Repeal of Eligible Capital Property (ECP) Regime
Under the current ECP regime, 75% of an eligible capital expenditure is added to the cumulative eligible capital (CEC) pool in respect of the business and is deductible at a rate of 7% per year on a declining-balance basis. The current regime also provides that 75% of an eligible capital receipt is first applied to reduce the CEC pool and then results in recapture of any CEC previously deducted. Any excess receipt is then included in income from the business at a 50% inclusion rate.
The budget proposes to repeal the ECP regime and replace it with a new CCA class of depreciable property. Expenditures that are currently added to CEC at a 75% inclusion rate would be added to the new CCA class at 100%. The CCA rate of the new class would be 5% (instead of 7% under the ECP regime). The existing CCA rules would generally apply to the new CCA class, including rules relating to recapture, capital gains and depreciation. The half-year rule would also apply. The proposed changes would significantly expand the ability to shelter such gains with available capital losses. Further, for CCPC, these capital gains would be subject to a higher rate of tax than would be the case under the current regime.
The proposals include transitional rules to transfer existing CEC pools to the CCA class as of an implementation date. The opening balance of the new CCA class for a particular business would be equal to the balance at that time of the existing CEC pool for that business. For the first 10 years, the depreciation rate for the new CCA class would be 7% for expenditures incurred before the implementation of the new rules. Subsequent qualifying receipts from the disposition of property the cost of which was included in the taxpayer’s CEC and do not represent the proceeds of disposition of property would reduce the balance of the new CCA class at a 75% rate. Further simplified transitional rules are to be considered for small businesses. The timing and implementation of this proposal will be subject to public consultation.
Accelerated CCA for Clean Energy Generation/Conservation Equipment
Accelerated CCA (50% per year on a declining basis) is available for specified clean energy generation and energy conservation equipment (Class 43.2 of Schedule II to the Income Tax Regulations). The 2014 Budget proposes to expand Class 43.2 to include water-current energy equipment and equipment used to gasify eligible waste fuel for use in a broader range of applications, if the equipment is acquired on or after February 11, 2014 that has not been used or acquired for use before that date.
Thin Capitalization Rules – Back-to-back Loans
Thin capitalization rules are intended to limit the deductibility of interest on debts owing to certain specified nonresident persons where the amount of debt exceeds a specified debt-to-equity ratio. In addition, interest paid or credited by a Canadian resident to a non-arm’s length nonresident is subject to Part XIII withholding tax at a rate of 25%, which could be reduced under a tax treaty. The thin capitalization rules were significantly amended in both the previous two budgets to (i) tighten their application by reducing the debt-to-equity ratio from 2:1 to 1.5:1, and (ii) extend their application to other non-corporate entities, including partnership, branch and trust.
The 2014 budget proposes to extend the anti-avoidance “loans made on condition” rule to apply more broadly to so-called back-to-back loan arrangements where an intermediary is interposed between the Canada debtor and certain non-resident persons. Specifically, the new rule will apply to arrangements when:
- a Canadian resident has a debt owing to a third-party intermediary, and
- a non-resident person uses its property to secure the debt, holds limited recourse debt of the intermediary, or makes a loan to the intermediary on condition that a loan be made to the Canadian resident.
When such arrangements exist, the Canadian resident will be deemed to have an amount owing to the non-resident person, equal to the lesser of the outstanding debt and the fair market value of pledged property or the amount of the limited resource loan or the loan made on condition. Related amount of interest will also be deemed to have been paid or payable to the non-resident person for thin capitalization purposes, and for Part XIII purposes to the extent that tax under that Part would otherwise be reduced by virtue of the arrangement.
The new anti-avoidance rules will apply to taxation years that begin after 2014 for the thin capitalization rules, and to amounts paid or credited after 2014 for Part XIII withholding tax purposes.
An anti-avoidance rule in the foreign accrual property income (FAPI) regime is intended to prevent Canadian taxpayers, e.g., financial institutions, from shifting income from the insurance of Canadian risks offshore. Effective for taxation years that begin on or after February 11, 2014, the budget proposes to amend the rules applicable to captive insurance companies in order to address insurance swap arrangements. The changes clarify that where the foreign affiliate’s risk of loss or opportunity for profit in respect of the insurance of one or more foreign risks can reasonably be considered to be determined by reference to one or more other risks (the “tracked risks”), and at least 10% of such tracked risks are Canadian risks, income from the insurance of the foreign risks and any income from a connected agreement or arrangement will be included in computing its FAPI. In turn, the Canadian taxpayer of which the foreign corporation is a foreign affiliate will be required to include the foreign affiliate’s FAPI in computing its income for Canadian tax purposes.
Offshore Regulated Banks
Effective for taxation years beginning after 2014, the budget proposes to clarify that the income earned by certain foreign affiliates that carry on business as a regulated foreign financial institution will be considered FAPI unless the Canadian taxpayer of which the foreign corporation is a foreign affiliate is a regulated Canadian financial institution, and more than 50% of the total taxable capital employed in Canada of the taxpayer and all related Canadian corporation is attributable to taxable capital employed in Canada in respect of regulated financial services businesses. Stakeholders are invited to submitted comments concerning its scope within 60 days of February 11, 2014.
Update on Automatic Exchange of Information for Tax Purposes
An agreement between Canada and the US was signed on February 5, 2014 under which Canadian financial institutions will be required to report to the CRA certain information that will be provided to the IRS under the Canada-US tax treaty and be subject to confidentiality safeguards. A variety of registered accounts (including RRSPs) and smaller deposit-taking institutions with assets of less than $175 million will be exempt from these reporting requirements. The CRA will also receive financial information from the US in respect of Canadian residents who hold accounts at US financial institutions. The reporting regime will come into effect starting in July 2014 with information exchanges beginning in 2015.
Consultation on Treaty Shopping – Domestic Rule Approach
Interest parties are invited to submit comments before April 13, 2014 on certain aspects of a proposed domestic rule intended to address treaty shopping. The proposed rule would include such elements as a main purpose test, a conduit presumption, a safe harbor presumption which reference approaches listed in the original consultation paper released in August 2013, and a measure which provides authorities with discretion to provide relief to the extent it is reasonable having regard to all the circumstances.
Consultation on Tax Planning by Multinational Enterprises
Comments are requested for submission before June 12, 2014 from stakeholders on a number of issues relating to tax planning undertaken by multinational enterprises, including matters raised in the context of the recent Organization for Economic Co-operation and Development’s base erosion and profit sharing (BEPS) Action Plan and the collection of sales tax on e-commerce sales to residents of Canada by foreign vendors.
Indirect Tax Measures
Group Relief Election
The budget proposes to extend the availability of the group relief election (generally referred to as the “nil consideration election”) to new group members that have not yet acquired any property, effective January 1, 2015. This extension only applies where the new members continue as going concerns engaged exclusively in commercial activities.
Under existing legislation, there is no requirement for the parties to a group relief election to file the election form with the CRA. Instead, the election must simply be completed by both parties and retained with their books and records. It is proposed that effective January 1, 2015, parties to a new election must file the group relief election with the CRA. Generally, the election is due by the first date on which any of the parties to the election is required to file a return for the period in which the election becomes effective. Parties to an election made before January 1, 2015 that is in effect on that date will have until January 1, 2016 to comply with this filing requirement.
Further, the budget proposes to subject parties of an existing or new group relief election to a joint and several liability provision for the GST/HST liability that may arise for supplies made between them on or after January 1, 2015.
Finance intends to propose new measures, as well as associated anti-avoidance measures, to allow joint venture participants to make joint venture election as long as the joint venture’s activities are exclusively commercial and the participants are engaged exclusively in commercial activities.
Health-related Goods and Services
The budget proposes to expand the GST/HST exemption for training designed to assist individuals with a disorder or disability to include the services of designing the training. This exemption will apply to the initial development and design of the plan and any subsequent adjustments and such designed service must be either:
- Supplied by a government or fully or partially subsidized under a government program, or
- Certified in writing by a recognized health care professional whose services are GST/HST exempt in the course of a professional-client relationship with an individual with a disorder or disability.
The budget further exempts from GST/HST professional services rendered to individuals by acupuncturists and naturopathic doctors.
These measures apply to supplies made after February 11, 2014.
Failing to Register for GST/HST
The budget proposes to give the CRA the discretionary authority to register and assign a GST/HST registration number to a person who fails to comply with the requirement to register, even after having been notified of the requirement. This measure will apply when the enacting legislation receives Royal Assent.
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