“Our goal is to
strengthen the financial security of Canadian workers and families, to help
create good jobs and long-term prosperity in every region of the country.
Still, it is not enough simply to maintain Canada’s advantage among the major
advanced economies. We must also position Canada to compete successfully with
the world’s large and dynamic emerging economies. In a changing global economy
we must aim higher. We must avoid falling behind. We must realize the enormous
potential of our great country.”
“We will not raise
taxes. We will maintain our consistent,
pragmatic, and responsible approach to the economy. We will take the necessary
next steps to build confidence in our future.”
The Honourable Jim Flaherty
Minister of Finance
BUSINESS INCOME TAX MEASURES
PERSONAL INCOME TAX MEASURES
CUSTOMS TARIFF MEASURES
OTHER TAX MEASURES
OTHER PREVIOUSLY ANNOUNCED MEASURES
The Honourable Jim Flaherty, Minister of Finance, tabled the
first federal budget of the majority Conservative government today. In his
Budget Speech, the Minister emphasized the Government’s focus on enabling and
sustaining Canada’s long-term economic growth and prosperity, and stressed the
importance of making reforms that are substantial, responsible and necessary.
He also reaffirmed the Government’s commitment made in the Economic Action Plan
of the 2009 Budget, to return to balanced budgets in the medium term, to not
raise taxes, to create high-quality jobs and to focus on long-term economic
growth for Canadians. He noted that the Government will take the next steps in
reducing the deficit by implementing restraint in Government spending. The projected deficit in 2011-12 is $24.9
billion, $21.1 billion in 2012-13 and is projected to continue declining to
$1.3 billion in 2014-15. The government expects that there will be a surplus of
$3.4 billion in 2015-16.
The 2012 Budget does not contain any new corporate income tax
rate changes. The most recent corporate income tax rate reductions have
resulted in a general federal corporate income tax rate of 15% in 2012. However, the 2012 Budget does introduce
corporate tax initiatives which continue the trend of prior years’ measures,
aimed at eliminating perceived tax loopholes and protecting the integrity of
the corporate tax base. In this regard,
the 2012 Budget contains proposals to amend the Income Tax Act (Canada) (the Act) which are stated to:
- Restrict the ability of foreign-based
multinational corporations to transfer, or “dump”, foreign affiliates into
their Canadian subsidiaries with a view to creating tax-deductible interest or
distributing cash free of withholding tax;
- Improve the effectiveness of Canada’s thin
capitalization rules; and
- Prevent the avoidance of corporate income tax
through the use of partnerships to convert income gains into capital gains.
In addition, the 2012 Budget introduces significant changes to
the Scientific Research and Experimental Development rules.
In this Budget Briefing 2012, we summarize these and the other of the 2012 Budget’s
BUSINESS INCOME TAX MEASURES
The 2012 Budget proposes a number of changes to the thin
capitalization rules of the Act, which are described as enactments of the
recommendations of the Advisory Panel on Canada’s System of International
Taxation. These changes reduce the debt-to-equity ratio, extend the scope of
the thin capitalization rules to debts of partnerships with corporate members,
treat disallowed interest expense as a dividend for withholding tax purposes,
and prevent double taxation on loans made by controlled foreign affiliates.
Generally, the thin capitalization rules deny the deduction of
interest paid by Canadian-resident corporations to specified non-residents to
the extent that a particular debt-to-equity ratio is exceeded in a year. The current debt-to-equity ratio is 2-to-1, generally meaning that the corporation’s “outstanding debts to specified
non-residents” (measured on the basis of the highest amount of such debts in
each month of the relevant taxation year) cannot exceed an amount equal to two times
the total of (a) the retained earnings of the corporation at the beginning of
the year (measured on an unconsolidated basis), (b) the corporation’s
contributed surplus for the year, to the extent contributed by specified
non-resident shareholders (measured as the average for the year of contributed
surplus for each month of the year) and (c) the corporation’s paid-up capital
for the year in relation to stock owned by specified non-resident shareholders
(measured as the average for the year of the paid-up capital of the corporation
at the beginning of each month).
The 2012 Budget proposes to change the debt-to-equity ratio of
the thin capitalization regime from 2:1 to 1.5:1, applicable for taxation years
beginning after 2012. The 2012 Budget
materials state that this ratio is high compared to actual industry ratios in
the Canadian economy and compared to thin capitalization regimes in other
countries, which may use a broader base for thin capitalization calculations.
The 2012 Budget further proposes to introduce to the thin
capitalization regime provisions that explicitly take into account debt owed by
partnerships. Under these rules, a corporation resident in Canada that is a
member of a partnership will be allocated its “specified proportion” of the
debts owed by the partnership for purposes of determining whether the
corporation has exceeded the debt-to-equity ratio. The “specified proportion” of a partner is
generally the partner’s proportionate share of the income or loss of the
The 2012 Budget materials indicate that an interest deduction
will not be denied to the partnership (such a denial would have an impact on
the other partners of the partnership that may not be subject to the thin
capitalization rules). Instead, an
amount corresponding to interest on debt of the partnership will be treated as an income
inclusion for the member corporation. Specifically, where the thin capitalization ratio of a corporation resident in
Canada is exceeded, and that corporation has been allocated a portion of the
debts owing by a partnership under the foregoing rule, the corporation will be
required to include in its income an amount corresponding to the interest on
the portion of the partnership debt allocated to the corporation that exceeds
the debt-to-equity ratio. The source of
the amount required to be included in income will be determined by reference to
the source against which the interest is deductible at the partnership level.
The new measure applies in respect of partnerships’ debts that
are outstanding during taxation years that begin on or after March 29, 2012.
Disallowed Interest Expense for Withholding Tax Purposes
The 2012 Budget proposes a further set of changes to the thin
capitalization regime that would generally deem any interest that is not
deductible to a resident corporation due to the thin capitalization rules (including for this purpose an amount included in computing the income of a resident corporation by virtue of
the new partnership inclusion rule), to be paid as a deemed dividend (and not
as interest) for purposes of the non-resident withholding tax regime of the
Act. Presumably these new rules are
being proposed because in many cases interest paid by residents of Canada to
non-residents of Canada can be made free of withholding tax, whether under the
rules of the Act or because of the application of the Canada-United States Income Tax Convention. Dividends paid by a person resident of Canada
to a non-resident are subject to a 25% withholding tax subject to potential
relief under an applicable tax treaty.
For purposes of these rules, the disallowed interest expense
of a corporation for a taxation year will be allocated to specified
non-residents in proportion to the corporation’s debt owing in the year to all
specified non-residents (having regard for these purposes to debts owing by
partnerships of which the corporation is a member). The corporation will be entitled to designate
the disallowed interest expense to the latest interest payments made to any
particular specified non-resident in a taxation year. In addition, interest that is payable in a
taxation year, but is not yet paid or credited at the end of the taxation year,
will be deemed to have been paid or credited as a dividend at the end of the
These proposals will be effective for taxation years that end
on or after March 29, 2012. For taxation years that include March 29, 2012, the
amount of the deemed dividend will be based on a pro-ration for the number of
days in the taxation year that are on or after March 29, 2012.
Preventing Double Taxation
In some circumstances, the thin capitalization rules can apply
in respect of loans made to a Canadian-resident from a controlled foreign
affiliate of the corporation. Under the foreign accrual property income (FAPI)
rules, certain interest income earned by a controlled foreign affiliate of a
taxpayer is taxable in the hands of the taxpayer on an accrual basis. The
combination of the FAPI rules and the thin capitalization rules can therefore
result in double taxation. Very generally, the 2012 Budget proposes to exclude
interest expense of a Canadian resident corporation, or of a partnership of
which it is a member, from the application of the thin capitalization rules, to
the extent that any portion of the interest is included in computing the income
of the corporation in respect of FAPI of a controlled foreign affiliate of the
corporation (net of any foreign accrual taxes).
This measure applies to taxation years that end on or after
March 29, 2012.
Scientific Research and
Experimental Development (SR&ED)
The 2012 Budget materials indicate that, informed by advice
contained in an October 2011 report provided by an expert panel led by Mr.
Thomas Jenkins (the Jenkins Report), the Government is committed to taking a
new approach to supporting innovation in Canada. The 2012 Budget announces significant new
funding over the next five years for direct R&D support and for venture
capital initiatives. As part of this new more direct approach to supporting
innovation, changes are being made to the current SR&ED tax incentive
program of the Act that will significantly reduce the tax benefits available
under this program, and that are intended to streamline the existing program.
- The general SR&ED investment tax credit rate
applicable to qualified expenditure pool balances will be reduced from 20% to
15% for taxation years that end after 2013, subject to pro-ration of the 5%
reduction for any such taxation year that includes days in 2013. The 35% rate and expenditure limit applicable
to Canadian-controlled private corporations will remain unchanged.
- Capital expenditures will no longer be eligible
for SR&ED deductions, nor for investment tax credits, applicable with
respect to property acquired on or after January 1, 2014. Further, amounts paid or payable in respect
of the use or the right to use property during any period that is after 2013
will no longer be eligible for deductions or credits, where such property
would, if acquired, be capital property.
For example, lease payments for certain equipment will no longer be
- The currently prescribed “proxy rate” used for a
simplified method of computing the eligible amount of SR&ED overhead
expenditures is being reduced from 65% to 60% for 2013, and to 55% thereafter,
subject to pro-ration of the reduction for taxation years that do not coincide
with the relevant calendar years.
- In respect of SR&ED performed for a taxpayer
by an arm’s length contractor, the amount of the taxpayer’s expenditures under
such contracts that are eligible for SR&ED investment tax credits will be
reduced from 100% to 80% as a proxy for excluding the profit element inherent
in arm’s length SR&ED contract payments.
This measure is applicable to expenditures incurred on or after January
1, 2013. Further, beginning in 2014, the
amount of contract expenditures incurred by a taxpayer that are eligible for
any SR&ED tax incentives will exclude any amount paid in respect of a
capital expenditure incurred by the contract performer, who will be required to
inform the taxpayer of such amounts. The
above-noted 80% eligibility limit will then apply to a taxpayer’s contract
costs net of such disallowed capital expenditures.
- Efforts will be made to improve the
administration and predictability of the SR&ED tax incentive program,
including a Canada Revenue Agency (CRA) pilot project to assess the feasibility
of a pre-approval process, an enhancement to the existing online self
assessment eligibility tool, improvements to the notice of objection process
and the consolidation and clarification of administrative policies. The Government will also conduct a study and
engage in consultations regarding current practices involving the use of
contingency fee arrangements for the preparation of SR&ED claims.
The 2012 Budget proposes new “foreign affiliate dumping” rules
that are intended to discourage certain cross-border investments that the
Government regards as being used as tools to erode the corporate tax base. The new rules apply to a Canadian corporation
(Canco) that is controlled by a non-resident corporation (Parent), where Canco
makes an investment in a non-resident corporation that is a foreign affiliate
(FA) of Canco (determined immediately after the investment is made), if the
investment may not reasonably be considered to have been made primarily for bona fide business purposes other than
to obtain a tax benefit. Where
applicable, the new rules deem Canco to have paid a dividend to Parent equal to
the value of any consideration (other than Canco shares) paid for the
investment, and prevent Canco from adding any amount to its paid-up capital in
respect of any Canco shares issued as consideration for the investment. The deemed dividend will be subject to Canadian
withholding tax at a rate of 25%, subject to potential relief under an
applicable tax treaty.
For the purposes of the foreign affiliate dumping proposals,
an investment in FA by Canco means any of the following:
- an acquisition of FA shares by Canco;
- a contribution to the capital of FA by Canco;
- a transaction where an amount becomes owing by
FA to Canco (other than an amount arising in the ordinary course of Canco’s
business that is repaid within a commercially reasonable period);
- an acquisition of an FA debt obligation by Canco
(other than an acquisition from an arm’s-length person in the ordinary course
of Canco’s business);
- an acquisition by Canco of an option in respect
of, or an interest or right in, shares of FA or a debt obligation of FA; and
- any transaction or event that is similar in
The primary factors to consider in determining whether the
investment is made for bona fide
business purposes include whether FA’s business activities are more closely
connected to the business activities of Canco than the business activities of
any non-arm’s length non-resident corporation (other than FA or its
subsidiaries); whether the investment was made at the direction or request of a
non-arm’s length non-resident corporation; whether Canco’s senior officers were
involved in negotiating the investment, or had principal decision-making
authority in respect of making the investment; whether FA’s performance is
connected with the performance
evaluation, or compensation of senior officers of Canco; and whether
senior officers of FA report to, or are functionally accountable to, senior
officers of Canco. While the 2012 Budget
lists the primary factors to be considered, it also recognizes that
distinguishing between foreign affiliate dumping transactions and transactions
that are undertaken for legitimate expansion of Canadian-based business is not
straightforward. Accordingly, the
Government invites comments concerning the details of the proposed “business
purpose test’ before June 1, 2012.
Additional rules will apply for purposes of the foreign affiliate dumping rules to look though certain
investments by partnerships, prevent avoidance of the rules through means of
certain indirect investments, and to eliminate paid-up capital where certain
Canadian subsidiary corporations emigrate from Canada.
The foreign affiliate dumping proposals apply to transactions
that occur on or after March 29, 2012, other than transactions that occur
before 2013 between parties that deal at arm’s length pursuant to terms of a
written agreement entered into before March 29, 2012.
Other Foreign Affiliate
The 2012 Budget confirms that the Government intends to
proceed with the significant foreign affiliate proposals introduced on August
27, 2010 and August 19, 2011, as modified to take into account consultations
and deliberations since their release. (See Osler Update of August 22, 2011.) The Budget also proposes to amend the foreign
accrual property income (FAPI) “base erosion” rules to alleviate the tax cost
to Canadian banks of using their foreign affiliates’ excess liquidity in their
Canadian operations. Amendments will also be developed to ensure that certain
securities transactions undertaken in the course of a bank’s business of
facilitating trades for arm’s length customers will not be inappropriately
caught by the base erosion rules. The 2012 Budget proposes to develop these
amendments in conjunction with industry representatives, with appropriate
safeguards to ensure the Canadian tax base is adequately protected.
Tax Avoidance Through
the Use of Partnerships
The Budget proposes two amendments to the Act that address
what the Budget materials describe as “tax avoidance through the use of
Bump Limitation Rule
Where a taxable Canadian corporation (the “parent”)
amalgamates with a wholly-owned subsidiary or causes such a subsidiary to be
wound-up, in certain circumstances, it may be possible to step-up or “bump” the
tax cost to the parent of non-depreciable capital property owned by the
subsidiary at the time that the parent acquired control of the subsidiary, up
to an amount equal to the fair market value of such property at such time. Non-depreciable capital property includes
interests in a partnership held by the subsidiary. On the other hand, depreciable properties,
resources properties, eligible capital property and property held on income
account are not eligible for the cost base bump (each, an “ineligible
The 2012 Budget materials indicate that transactions were
undertaken where ineligible property was transferred to a partnership by a
subsidiary prior to the acquisition of control of the subsidiary, and the tax cost of the partnership interest
was subsequently bumped on the winding-up or the amalgamation of the
subsidiary. The 2012 Budget proposes to
amend the Act to reduce the maximum bump in the cost of a partnership interest
owned by the subsidiary, to the extent that the accrued gain on the partnership
interest is attributable to accrued gains on ineligible properties held by the
partnership directly or indirectly through other partnerships.
The bump limitation rule will apply even if the ineligible
properties were not acquired by a partnership as part of the same series of
transactions as the parent’s acquisition of control of the subsidiary. The proposal does not restrict the ability to
obtain a bump on shares of a corporation to which the subsidiary has
transferred ineligible property prior to the acquisition of control.
The proposed rule will apply to amalgamations that occur, and
windings-up that begin, on or after March 29, 2012, subject to a limited
grandfathering rule. In particular, the
proposed rule will not apply to an amalgamation that occurs before 2013, or a
winding-up of a subsidiary that begins before 2013, if the parent acquired
control of the subsidiary before March 29, 2012 (or was obligated to do so as
evidenced in writing), provided that the parent had the intention, also
evidenced in writing before March 29, 2012, to amalgamate with or wind-up the
Sales of Partnerships to
Tax-Exempts or Non-Residents
Subsection 100(1) of the Act provides that where a taxpayer
sells a partnership interest to a tax-exempt person and realizes a capital gain,
the amount of the taxpayer’s taxable capital gain is deemed to be one-half of
the amount of the capital gain attributable to accrued gains on non-depreciable
capital property plus 100% of the remainder of the capital gain. This effectively results in a 100% inclusion
rate (vs. the ordinary capital gain inclusion rate of 50%) to the extent that
the accrued gain on the partnership is attributable to accrued gains on
partnership assets, other than non-depreciable capital property (“income
assets”). The Budget materials indicate
that such an inclusion is required since the tax-exempt purchaser could wind-up
the partnership without paying any tax on the accrued gain on the income
The 2012 Budget proposes to amend subsection 100(1) of the Act
in two ways. First, the subsection is to
be expanded so that it also applies where a taxpayer directly or indirectly
disposes of a partnership interest to a non-resident person. However, an exception is provided if
immediately before and immediately after the acquisition by the non-resident,
the partnership uses all or substantially all of the partnership’s property in
carrying on business through a permanent establishment in Canada. The 2012 Budget materials indicate that this
extension is necessary since otherwise an interest in a partnership that holds income assets could be
disposed of to a non-resident, and the partnership might be wound-up free of
tax either under the Act (e.g., if the partnership did not carry on business in
Canada and did not hold taxable Canadian property) or in reliance on one of
Canada’s tax treaties.
Second, the section will be amended to apply where, as part of
a transaction or a series of transactions or events, a taxpayer disposes of an
interest in a partnership, and that interest is directly or indirectly acquired
by a person exempt from tax. This
proposed amendment is intended to ensure that the section applies to direct and
indirect dispositions of a partnership interest to a tax-exempt person.
The two amendments to section 100 will apply to dispositions
of an interest in a partnership made by a taxpayer on or after March 29, 2012,
other than an arm’s-length disposition made before 2013, if the taxpayer was
obligated to make the disposition pursuant to a written agreement entered into
by the taxpayer before March 29, 2012.
The 2012 Budget contemplates that other amendments to the Act
may be made as necessary to give effect to the proposals described in the 2012
Budget materials relating to the use of partnerships for tax avoidance.
The 2012 Budget proposes new additional transfer pricing
legislation in section 247 of the Act that will allow the CRA to make a so-called
“secondary adjustment”. To date, the
CRA’s policy has been to assess such adjustments under more general provisions of the Act. The proposed rules respond to the
recommendation of the Transfer Pricing Committee of the Advisory Panel on
Canada’s System of International Taxation that legislative changes be made to
clarify the treatment of secondary adjustments under the Act as constructive
dividends. Where the terms or conditions
of a transaction or series of transactions between a Canadian resident corporation
and a non-arm’s length non-resident do not reflect arm’s length conditions, the
CRA may make a “primary adjustment” to the transaction or series to reflect arm’s
length terms and conditions. The
secondary adjustment accounts for the benefit conferred on the non-arm’s length
non-resident as part of the transaction or series (e.g., by receiving too much
for goods or services).
The proposed rules deem a dividend to have been paid by the
Canadian-resident corporation to a non-arm’s length non-resident participant in
the transaction or series, in proportion to the amount of the primary
adjustment that relates to the non-resident.
The dividend is deemed to have been paid at the end of the taxation year
in which the primary adjustment is made.
The deemed dividend arises regardless of whether the non-resident was a
shareholder of the Canadian corporation (but such a benefit conferred on a
controlled foreign affiliate of the corporation is not subject to the new
rules). The deemed dividend would be
subject to a 25% withholding tax subject to available relief under an
applicable tax treaty.
The proposed legislation allows for a reduction (and
potential elimination) of the deemed dividend where the non-resident
repatriates the excess amount paid, provided the repatriation is made with the
concurrence of the Minister of National Revenue (the Minister). As an example, if a Canadian corporation pays
$20 more to its non-resident parent for goods than an arm’s length party would
pay, then in addition to the $20 primary transfer pricing adjustment, proposed new
subsection 247(12) will deem a $20 dividend to have been paid by to the
parent. If the Minister agrees to a
request to repatriate the excess $20 received, proposed new subsection 247(13)
would reduce the amount of the deemed dividend to $0. Interest on tax not withheld on the deemed
dividend will be payable for the period starting when the excess payment from
the Canadian corporation is made until the amount is repatriated from the
non-resident, subject to relief from the Minister as it considers
The proposed legislation applies to transactions (including
transactions that are part of a series of transactions) that occur on or after
March 29, 2012.
Expansion of Clean
Energy CCA Incentives
Class 43.2 of Schedule II of the Income Tax Regulations provides for accelerated capital cost
allowance (CCA) for specified clean energy generation and conservation
equipment. The 2012 Budget proposes to
expand the assets eligible for the Class by: eliminating the requirement that
waste-fuelled thermal energy equipment be used in an industrial process or greenhouse
thus allowing such equipment to be used in a broader range of applications;
expanding eligible district energy systems to include systems that transfer thermal
energy primarily generated by waste-fuelled thermal energy equipment; and
expanding the list of eligible waste fuels that can be used in waste-fuelled
thermal energy equipment or a cogeneration system to include plant
The 2012 Budget also proposes that equipment, acquired on or
after March 29, 2012, that uses eligible waste fuel, must be compliant with
applicable environmental laws and regulations at the time the equipment first
becomes available for use to be eligible for inclusion in Class 43.2 (or Class
Phasing Out Preferences
for Resource Industries
As part of the stated commitment to make the tax system more
neutral across sectors, the 2012 Budget proposes to phase out the existing 10%
tax credit available for exploration and pre-production mining expenditures incurred in respect
of certain mineral resources in Canada, and the existing 10% Atlantic
investment tax credit (AITC) available in respect of certain oil and gas and
mining activities in the Atlantic region.
Corporate Mineral Exploration and Development Tax Credit
– For exploration expenses, the credit will apply at a rate of 10% for 2012, 5%
for 2013, and nil thereafter. For
pre-production development expenses, the credit will apply at a rate of 10%
prior to 2014, 7% for 2014, 4% for 2015, and nil thereafter. Additional transitional relief is provided in
respect of pre-production development expenses incurred before 2016 if they
were contracted under a written agreement entered into before March 29, 2012,
or as part of the development of a new mine the construction of which, or the
engineering and design work for the construction of which (evidenced in
writing), commenced before March 29, 2012.
Exploration and pre-production development expenses will continue to
qualify as Canadian exploration expenses (and as such are fully deductible in
the year incurred).
Atlantic Investment Tax Credit – The AITC will apply at
a rate of 10% for assets acquired before 2014, 5% for 2014 and 2015, and nil
thereafter. Additional transitional
relief is provided in respect of assets acquired before 2017 under a written agreement
entered into before March 29, 2012, or as part of a project phase the
construction of which, or the engineering and design work for the construction
of which (evidenced in writing), commenced before March 29, 2012.
The availability of the AITC for assets acquired for use other
than in oil and gas and mining activities is not affected. The 2012 Budget also proposes that certain
electricity and clean energy generation equipment used in the Atlantic region
primarily in an eligible activity will qualify for the AITC.
Tax Compliance Burden
The 2012 Budget materials identify a series of measures to be
implemented by the CRA with a view to simplifying the tax compliance burden of
small businesses, including improvements to CRA online account portals and
other electronic services.
PERSONAL INCOME TAX MEASURES
Eligible Dividends –
Split-Dividend Designation and Late Designation
Under the rules of the Act, the dividend tax credit (DTC) is
available to shareholders to help relieve the double taxation of corporate
income, which is subject to tax at both the corporate level and at the personal
shareholder level. An “eligible dividend,” i.e., a dividend paid out of income
that was taxed at the general corporate income tax rate, qualifies for an
enhanced DTC. A taxable dividend that is not an eligible dividend, i.e., a
dividend paid out of income that was taxed at a lower rate (most often the
small business income tax rate), qualifies for the regular DTC.
The 2012 Budget proposes to simplify the manner in which a
corporation resident in Canada designates eligible dividends, by allowing the
corporation to designate any portion of a dividend to be an eligible dividend
at the time it pays out a taxable dividend. In addition, the 2012 Budget
proposes that a corporation would have the ability to make a late designation
of eligible dividends up to three years after the day the designation was first
required to be made, provided the Minister is of the
opinion that accepting the late designation is just and equitable in the circumstances.
These measures will apply to taxable dividends paid on or after March 29, 2012.
Employee Profit Sharing
Employee Profit Sharing Plans (EPSPs) are trust arrangements
that are intended to enable employers to share profits with their employees. The 2012 Budget introduces a special tax
payable by specified employees on excess EPSP amounts. A specified employee is an employee who has a
significant equity interest in the employer or who does not deal at arm’s
length with the employer. An excess EPSP
amount of a specified employee is the portion of the employer’s EPSP
contribution that is allocated by the plan trustee to the specified employee
that exceeds 20% of the employee’s annual salary. The rate of the special tax will be equal to
the top combined federal and provincial marginal tax rate. In the case of a specified employee resident
in the province of Quebec, the tax rate will be equal to the top federal
marginal rate. Any excess EPSP amount
will not also be subject to regular income tax.
This special tax will apply in respect of EPSP contributions
made on or after March 29, 2012, other than contributions made before 2013
pursuant to a legally binding obligation arising under a written agreement or
arrangement entered into before March 29, 2012.
A retirement compensation arrangement (RCA) is a form of
retirement savings arrangement generally funded by employer contributions. The 2012 Budget proposes new prohibited
investment and advantage rules to prevent RCAs from engaging in certain
non-arm’s length transactions. The new
rules will impose a special tax on RCAs, and will be closely based on existing
rules for Tax-Free Savings Accounts and Registered Retirement Savings
Plans. The 2012 Budget also proposes new
restrictions on the ability to obtain RCA tax refunds where the property of the
RCA has decreased in value as a result of a prohibited investment or advantage.
The prohibited investment rules will generally apply to
investments that were acquired or became prohibited investments on or after
March 29, 2012. The advantage rules will generally apply to advantages
extended, received or receivable on or after March 29, 2012, including RCA
advantages that related to property of the RCA acquired, or transactions
occurring before March 29, 2012. The
rules restricting the RCA tax refunds will apply in respect of RCA tax on RCA
contributions made on or after March 29, 2012.
The 2012 Budget proposes several changes to the rules
governing Registered Disability Savings Plans (RDSPs). These changes include: (i) permitting certain
family members to become plan holders of an RDSP on a temporary basis, for
adults who might not be able to enter into a contract; (ii) introducing a
proportional repayment rule to replace the 10-year government repayment rule
for certain withdrawals made after 2013; (iii) amending the maximum and minimum
withdrawal limitations and requirements; (iv) allowing investment income earned
in a registered education savings plan to be transferred to an RDSP on a tax-free
rollover basis provided the plans share a common beneficiary and certain other
conditions are met; and (v) extending the period for which an RDSP may remain
open when a beneficiary becomes ineligible for the disability tax credit.
Group Sickness or
Accident Insurance Plans
Employer contributions made to a group sickness or accident
insurance plan are generally not included in an employee’s income. The 2012 Budget proposes to include the
amount of an employer’s contributions to a group sickness or accident insurance
plan in an employee’s income for the year in which the contributions are made,
to the extent the contributions are not in respect of a wage loss replacement
benefit payable on a periodic basis.
This measure will apply in respect of employer contributions made on or
after March 29, 2012 to the extent that the contributions relate to coverage
under the plan after 2012. Contributions
made on or after March 29, 2012, but before 2013, will be included in the
employee’s income for 2013.
Mineral Exploration Tax
The 15% mineral exploration tax credit available to
individuals in respect of specified mineral exploration expenses incurred in
Canada, and renounced to them in respect of flow-through share investments, was
scheduled to expire at the end of March 2012. The 2012 Budget proposes to
extend the credit for another year, by extending: (1) the date for incurring
qualifying exploration expenditures to the end of 2014; and (2) the deadline
for the corporation and the investor to enter into a flow-through share
subscription agreement governing renunciation to March 31, 2013.
Overseas Employment Tax
The overseas employment tax credit (OETC) entitles qualifying
employees who are residents of Canada to a tax credit equal to the federal income
tax otherwise payable on 80% of their qualifying foreign employment income, up
to a maximum foreign employment income of $100,000. The 2012 Budget proposes to
phase out the OETC over four years, during which the factor will be reduced
from 80% to 60% for the 2013 taxation year, 40% for the 2014 taxation year, 20%
for the 2015 taxation year, and nil for 2016 and subsequent taxation years. The
phase out rules will not apply with respect to qualifying foreign employment
income earned by an employee in connection with a project or activity to which
the employee’s employer had committed in writing prior to March 29, 2012. In
this circumstance, the employee’s OETC will remain at 80% until it is eliminated
Medical Expense Tax
The Medical Expense Tax Credit provides income tax relief for
taxpayers with above-average medical and disability-related expenses. The 2012
Budget proposes to add blood coagulation monitors, when prescribed for use by a
medical practitioner, to the list of qualifying medical expenses eligible for
the credit. This measure will apply to expenses incurred after 2011.
Life Insurance Policy
A holder of a life insurance policy is exempt from the income
accrual rules in respect of the policy if the policy is an exempt policy. A life insurance policy is an exempt policy
if the fund accumulating within the policy (that is, the savings component)
does not exceed the fund that would have accumulated in a benchmark
policy. This test is commonly referred
to as the exemption test.
The benchmark policy is a hypothetical policy prescribed by
the Income Tax Regulations. It is intended to establish a benchmark that
differentiates between an insurance or protection oriented life insurance
policy and an investment oriented life insurance policy.
The regulations defining the exemption test date back to the
early 1980s. Since then, there has been
a significant evolution in the form of life insurance policies being sold in
the Canadian market. Consequently, it is
generally accepted that the exemption test needs to be updated.
The 2012 Budget proposes to make several technical
improvements to the exemption test to reflect improvements in life expectancy,
current interest rates, and industry practices in Canada and other
countries. Consequential changes will
also be made to the investment income tax under Part XII.3 of the Act (a proxy
tax imposed on the life insurer on the savings component of an exempt policy).
The Canadian life insurance industry has been engaged in
consultations for many years with the Government with respect to the exemption
test, and further consultations are contemplated. Any amendments to the tax rules arising from
these consultations will apply to life insurance policies issued after 2013.
Budget proposes to amend the Goods and Services Tax/Harmonized Sales Tax (GST/HST)
portions of the Excise Tax Act and related regulations
to implement the following specific relieving GST/HST measures, which generally
become effective as of March 30, 2012.
Pharmacists’ Services – Certain non-dispensing health
care services provided by pharmacists, as well as certain diagnostic services
ordered by pharmacists, will be made exempt from GST/HST. (Drug dispensing
services are already GST/HST-free.)
Corrective Eyewear – The existing GST/HST-free
treatment of corrective eyewear will be extended to certain circumstances where
the eyewear is supplied on the recommendation of an optician.
Medical Devices – Blood coagulation monitoring or
metering devices and associated supplies will be added to the list of
GST/HST-free medical devices. The circumstances in which certain other medical
devices can be purchased free of GST/HST will be expanded.
Drugs – An additional drug will be added to the list of
GST/HST-free non-prescription drugs used for the treatment of disease.
Rebate for Books
Certain prescribed charitable or non-profit literacy
organizations will be entitled to claim a rebate of the GST (and the federal
portion of the HST) that they pay on printed books to be given away.
Small Business Measure
The size thresholds for determining eligibility to use certain
streamlined GST/HST accounting methods will be doubled, permitting more small
businesses to qualify. This measure will be effective for GST/HST reporting
periods, and rebate claim periods, beginning after 2012.
Foreign-based Rental Vehicles
A full or partial exemption from the GST/HST and certain
excise taxes otherwise payable at the border will be provided for foreign-based
rental vehicles temporarily brought into Canada by Canadian residents,
effective June 1, 2012.
CUSTOMS TARIFF MEASURES
The Budget proposes to eliminate the 5% Most-Favoured-Nation
duty rate on certain imported oils used as production inputs in gas and oil
refining as well as electricity production.
Effective June 1, 2012, the travellers’ exemption limit (i.e.,
the value of goods that can be imported by Canadian travellers on a duty and
tax-free basis) will be increased from $50 to $200, for returning Canadian
residents who are out of the country for at least 24 hours. The 2012 Budget
also proposes to increase exemption levels for travellers who are out of the
country for 48 hours or more to $800. This new threshold will replace the
current 48-hour exemption of $400 and the current 7-day exemption of $750.
OTHER TAX MEASURES
Charitable Sector Tax
The 2012 Budget introduces a number of new measures to the Act
intended to increase compliance and disclosure by charities regarding
applicable limitations on political activities.
The 2012 Budget proposes a new deeming rule stating that where a charity
makes a gift that can be regarded as supporting the political activities of a
qualified donee, the expenditure will be deemed to be made by the charity on
political activities. The 2012 Budget
also proposes to grant the CRA the authority to suspend for one year the
tax-receipting privileges of a charity that exceeds applicable limitations on
political activities. (More generally,
if a charity provides inaccurate or incomplete information in its annual
information return, the CRA will now also have authority to suspend tax-receipting privileges until the charity provides the required
The 2012 Budget proposes to modify the rules for registering
certain foreign charitable organizations as qualified donees so that organizations
must pursue activities that are related to disaster relief, urgent humanitarian
aid, or that are in Canada’s national interest.
The 2012 Budget proposes to encourage tax shelter registration
and reporting by: modifying the calculation of the penalty applicable to a
promoter when a person participates in an unregistered charitable donation tax
shelter; introducing a new penalty for a promoter who fails to meet their
reporting obligations with respect to annual information returns; and limiting
the validity period for a tax shelter identification number to one calendar
OTHER PREVIOUSLY ANNOUNCED MEASURES
The 2012 Budget confirms the Government’s intention to proceed
with a number of previously announced tax measures, as modified to take into
account consultations and deliberations since their release, including the
Income Tax Measures
Legislative proposals released on July 16, 2010 concerning
restrictive covenants, section 143.3 of the Act, the general corporate income
tax rate, investment income earned by cooperatives and credit unions and draft
amendments to the Income Tax Regulations that were
re-announced by the Government on July 16, 2010.
Legislative proposals released on August 27, 2010 to implement
a number of tax measures from the 2010 Budget including non-resident trusts.
Legislative proposals released on November 5, 2010 relating to
income tax technical amendments to the Act dealing with partnerships, pensions,
labour-sponsored venture capital corporations and the lifetime capital gains
Legislative proposals released on December 16, 2010 concerning
the rules for qualification as a REIT (and associated tax treatment).
Legislative proposals released on March 16, 2011 relating to
the deductibility of contingent amounts, withholding tax on interest paid to
certain non-residents, and the tax treatment of certain life insurance
Measures announced on July 20, 2011 relating to specified
investment flow-through entities, real estate investment trusts and publicly-traded
Legislative proposals released on October 31, 2011 relating to
income tax technical amendments.
Income tax and GST/HST amendments to accommodate the
introduction of Pooled Registered Pension Plans (including legislative
proposals released on December 14, 2011).
Automobile expense amounts for 2012 announced on December 29,
The commitment made in the 2010 Budget to explore whether new
rules for the taxation of corporate groups could improve the functioning of the
corporate tax system.
Sales Tax Measures
Legislative proposals released on January 28, 2011 concerning
certain GST/HST rules relating to investment plans (e.g., mutual funds, pooled
funds, segregated funds of insurers and pension plans).
Legislative proposals released on October 31, 2011 relating to
sales and excise tax technical amendments.
Income tax and GST/HST amendments to accommodate the
introduction of Pooled Registered Pension Plans (including legislative
proposals released on December 14, 2011).
Measures announced on February 17, 2012 relating to
transitional rules for the elimination of the Harmonized Sales Tax in British
To access the 2012 Budget and related documents, go here http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html
If you have any questions or require additional analysis on
the 2011 Budget tax measures, please contact any member of our National Tax Department.