2014-2015 federal budget highlights
Canadian tax alert
February 11, 2014
The Minister of Finance, James M. Flaherty, presented the 2014-2015 budget in the House of Commons this afternoon. The government’s focus continues to be on balancing the budget. Nonetheless, a number of measures aimed at supporting job creation, skills training and improving the job vacancy rate, as well as investments in infrastructure and transportation are proposed. In addition, the budget introduces expenditures to enhance research and innovation in Canada, including the Canada First Research Excellence Fund. As we believe that sustained economic growth in Canada will depend on our country’s ability to enhance productivity, we welcome the budget’s innovation friendly measures as a step in the right direction.
The budget, while somewhat light on tax measures, does contain a number of proposals that are aimed at closing perceived loopholes and invites consultation with the public in some areas.
The following is a summary of the tax highlights contained in the budget.
Mr. Flaherty indicated that the deficit will decline to $2.9 billion in 2014-2015. A surplus of $6.4 billion is expected in 2015–2016. The federal debt-to-GDP ratio is estimated to be approximately 33% for 2013-2014. This ratio is projected to decline to 32% in 2014-2015 and continue to do so thereafter, reaching 25% in 2021-2022. Unemployment is currently at 7% and the job vacancy rate is currently at 4.2%.
Measures concerning business
- 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 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 foreign accrual property income (FAPI).
- 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 corporations is attributable to taxable capital employed in Canada in respect of regulated financial services businesses. Stakeholders are invited to submit comments concerning the scope of this proposal within 60 days of February 11, 2014.
- The budget proposes to introduce new measures intended to prevent Canadian taxpayers from avoiding the application of Canada’s thin capitalization rules and/or the imposition of non-resident withholding tax on interest by entering into back-to-back loan arrangements, whereby an unrelated third party is interposed between the Canadian taxpayer and a related non-resident person. Where a back-to-back loan arrangement is considered to exist, the intermediary would be ignored and the thin capitalization rules and the non-resident withholding tax rules would apply to the extent that the intermediary has received a loan from, become indebted to, or been pledged property as security by the related non-resident person. This measure is applicable, in respect of the thin capitalization rules, to taxation years beginning after 2014, and to amounts of interest that are paid or credited after 2014.
- The budget announces the government’s intention to seek input from stakeholders on a number of issues relating to tax planning undertaken by multinational enterprises, including matters raised in the context of the recent Organisation for Economic Co-operation and Development’s base erosion and profit shifting (BEPS) Action Plan and the collection of sales tax on e-commerce sales to residents of Canada by foreign vendors. Comments are requested within 120 days of February 11, 2014.
- Building on the consultation process announced in Budget 2013, the government invites interested parties to submit comments within 60 days of February 11, 2014 on certain aspects of a proposed rule intended to address treaty shopping. The proposed rule would include such elements as a main purpose test, a conduit presumption, safe harbour exceptions 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. The budget indicates that this rule would have prospective application, and would be enacted by way of an amendment to the Income Tax Conventions Interpretation Act. Comments are also requested on a number of examples which illustrate the intended application of the proposed rule to a number of arrangements, as well as the appropriateness of transitional relief.
- To encourage investment in clean energy generation, the budget plans to expand Class 43.2 which provides an accelerated capital cost allowance (CCA) rate, to include water-current energy equipment and property used to gasify eligible waste fuel for other applications. The changes will apply to property acquired after February 10, 2014.
- The budget announces public consultation on a proposal to repeal the eligible capital property regime. The regime would be replaced with a new CCA class with an annual depreciation rate of 5% and a 100% inclusion rate for expenditures currently added to cumulative eligible capital.
- The remittance thresholds for employer source deductions are proposed to be increased to reduce the tax compliance burden. For employers required to remit up to two times per month, the threshold level of average monthly withholdings is to be increased to $25,000 from $15,000. For employers who are required to remit up to four times per month, the threshold level of average monthly withholdings is to be increased to $100,000 from $50,000. These increases will apply to amounts to be withheld after 2014.
- The budget includes a reminder of the recent conclusion of an intergovernmental agreement between Canada and the United States which provides relief and clarifies the application of the Foreign Accounts Tax Compliance Act (FATCA) to persons holding financial accounts in Canada. Reporting arrangements provided for in the agreement will commence on July 1, 2014.
Measures concerning individuals
- Beginning in 2016, the budget proposes to implement flat top-rate taxation of estates for taxation years that end more than 36 months after the death of the relevant individual, and to all grandfathered inter vivos trusts and trusts created by will. In addition, a number of other related exemptions are proposed to be eliminated for such trusts, including the elimination of the exemption from the calendar year taxation year requirement, the income tax instalment rules, various tax administration rules, and others noted in the previously-released consultation paper.
- Notwithstanding the amendments noted above, the budget includes an exception which ensures that graduated rates will continue to be applied in respect of testamentary trusts that have individuals who are eligible for the federal Disability Tax Credit as beneficiaries.
- The budget proposes to eliminate the exception which prevents a particular trust from being deemed a resident of Canada where contributors to the trust are individuals each of whom is a newly resident Canadian (defined as an individual that is resident in Canada for a total period of not more than 60 months). This measure is effective for taxation years of trusts that end on or after February 11, 2014, unless the exception would have otherwise applied after 2013 and before February 11, 2014, and no contributions are made to the trust on or after February 11, 2014 and before 2015, in which case, the measure applies for taxation years ending after 2014.
- 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.
- The budget proposes to expand the scope of the "kiddie tax" by modifying the definition of split income to include income from business or rental activities that is directly or indirectly paid or allocated to a minor from a trust or partnership, provided certain conditions are met. This change will apply to the 2014 and subsequent taxation years.
- The budget proposes to extend the 15% Mineral Exploration Tax Credit for flow-through share investors for one year to flow-through share agreements entered into on or before March 31, 2015.
- To promote the donation of ecologically sensitive land, the budget proposes to extend the carryforward period for the Charitable Donations Tax Credit or deduction by an additional 5 years, bringing it to 10 years. This measure applies for donations made on or after February 11, 2014
- Existing rules limiting the amount of a Charitable Donations 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
- Effective as of the 2014 taxation year, the budget proposes to increase the maximum amount of eligible expenses under the Adoption Expense Tax Credit to $15,000 per child and to index that amount to inflation for taxation years after 2014.
- The Medical Expense Tax Credit is proposed to be expanded 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 specially 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.
- 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).
- The budget includes two proposed measures for farming and fishing businesses. In particular, the rules related to property qualifying for the intergenerational rollover and the lifetime capital gains exemption are proposed to be amended. 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.
- 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 registered retirement savings plan (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
- For members leaving a registered pension plan 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.
- For 2014 and later years, the budget proposes to allow the Canada Revenue Agency to automatically determine if an individual is eligible to receive the goods and services tax/harmonized sales tax (GST/HST) credit, without requiring the individual to apply for the credit when filing his/her tax return.
Sales and excise tax measures
- Effective January 1, 2015, the budget proposes to extend the availability of group relief from the goods and GST/HST under the “nil consideration election” to new members of a closely related group who have not yet acquired any property provided that the new members continue as going concerns engaged exclusively in commercial activities.
- A new filing requirement for the nil consideration election is proposed for members of a closely related group which will be 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. This new requirement is proposed to be effective January 1, 2015. Parties to an election made before January 1, 2015 will have until January 1, 2016 to comply.
- The budget proposes that parties to an existing or new group relief election will be considered jointly and severally liable for any GST/HST liability that may arise in relation to the supplies made between them beginning January 1, 2015.
- • Effective for supplies made after February 11, 2014, services relating to the development of training that is specifically designed to assist individuals with a disorder or disability are proposed to be included in the GST/HST exemption for providing training relating to such services provided certain criteria are met.
- It is proposed that for services rendered after February 11, 2014, services provided by acupuncturists and naturopathic doctors rendered to individuals will be exempt from GST/HST.
- The budget proposes that effective after February 11, 2014, eyewear specifically designed to treat or correct a defect of vision by electronic means that is supplied by written order of a physician or optometrist be considered a GST/HST zero-rated supply.
- The government intends to propose new measures that will allow more commercial joint venture participants to access the GST/HST simplification benefits currently available when a joint venture election is filed. Draft legislative proposals will be released later in the year, followed by a consultation period.
- The budget proposes that the Minister of National Revenue be given the authority to register and assign GST/HST numbers where a person fails to comply with the requirement to register. This measure will apply on Royal Assent to the enacting legislation.
- A number of measures are proposed that will generally increase the tax on tobacco products.
- Effective for excise tax returns filed after the day of Royal Assent to the relevant legislation, the budget proposes to add penalties for making false statements or omissions in respect of the non-GST/HST portion of the Excise Tax Act.
- To support advanced research and innovation, the budget proposes to create the Canada First Research Excellence fund with $1.5 billion over the next 10 years for post-secondary research. In addition, new funding will be provided to Mitacs for industrial research and training of postdoctoral fellows, to colleges and polytechnics to foster social innovation, to the TRIUMF physics laboratory, to Atomic Energy of Canada Limited, to the Institute for Quantum Computing, and to create the Open Data Institute.
- Further support for business innovation in Canada in the budget includes additional funding for the Canada Accelerator and Incubator program, the granting councils in support of advanced research and scientific discoveries, and the Automotive Innovation Fund.
- The budget announces over $1 billion for federal infrastructure projects, including a new bridge for the St. Lawrence River, rehabilitating and improving Montreal bridges, supporting Atlantic ferries, repairing and maintaining small craft harbours and improving regional and local ports.
- The 20% rate of duty on mobile offshore drilling units, currently the subject of a remission order that is set to expire in May 2014, is proposed to be eliminated for goods imported on or after May 5, 2014.
- The budget includes measures which will enable the Minister of National Revenue to refuse or revoke the registration of a charity that accepted a donation, on or after February 11, 2014, from a foreign state listed as a supporter of terrorism.
- The budget announces the government’s intention to review the current income tax exemption for non-profit organizations to determine whether the rules are still properly targeted and permit enough transparency and accountability. A consultation paper will be released for comment.
- The budget proposes to permit charities to register and file annual information returns electronically.
For further details, we refer you to the Ministry of Finance website.
Canadian managing partner, Tax
National tax policy leader
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