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Friday, March 30, 2012

2012 Federal Budget Highlights (KPMG)

2012 Federal Budget Highlights (KPMG)

March 29 2012

No. 2012-15


Finance Minister Jim Flaherty delivered the government’s much-anticipated 2012 federal budget today. The budget expects a deficit of $24.9 billion for 2012, falling to $21.1 billion for 2013, $10.2 billion for 2014 and to $1.3 billion for 2015. As a result of expenditure restraints, the budget is expected to achieve ongoing savings of $5.2 billion.

A major thrust of the budget this year is innovation. The government has responded to the recommendations of the Jenkins panel. As a result, there is more direct support provided for R&D in Canada and a scaling back of the benefits of the Scientific Research and Experimental Development (SR&ED) tax incentive program. The government has also moved to close what it considers to be tax loopholes, including important changes in the personal, corporate, charities and international tax areas. In the GST/HST area, the budget extends some health care-related changes.

Details of tax highlights in the budget are as follows.


Scientific Research and Experimental Development Initiatives


Acting upon the recommendations of a recent report submitted by the Jenkins Panel, the government is looking to support innovation in Canada using a markedly different funding model. Effective immediately, the government announced $1.1 billion for direct research and development support as well as providing $500 million for venture capital initiatives. Approximately $1.3 billion of this new funding is being redirected from the flagship Scientific Research and Experimental Development (SR&ED) tax incentive program as the government seeks to stimulate and support innovation through research and development (R&D) activities carried on by business.

Canada continues to lag behind other countries when it comes to private sector investment in R&D and more importantly, the commercialization of research into products and processes that create high-value jobs.

Direct supports

This new approach to supporting innovation in Canada is accomplished though the following measures:

  • Venture capital funding — The government will provide $400 million for venture capital activities for private sector investments through a structure yet to be determined. In addition, $100 million will be provided to the Business Development Bank of Canada to further support venture capital activities.
  • Industrial Research Assistance Program (IRAP) – An additional $110 million per year will be provided to the National Research Council (NRC) to be used under the IRAP program which supports research and development projects carried out by small and medium sized businesses (SMEs). The NRC will also create a concierge service to assist SMEs in accessing and making effective use of federal innovation programs.
  • Funding is provided for various new or existing programs such as:
    • Industrial Research and Development Internship Program
    • Business-Led Networks of Centres of Excellence Program
    • Expanding Market Opportunities Program and the Forest Innovation Program
    • Canadian Innovation Commercialization Program
    • National Research Council to support business driven and industry relevant applied research.

SR&ED tax incentive program

In an effort to simplify the SR&ED program, make the program more cost-effective and streamline the compliance and administration efforts of business and CRA, the budget announced the following changes:


  • Reduction of general tax credit rate — The general SR&ED investment tax credit rate will be reduced to 15% (from 20%), effective January 1, 2014.
  • Capital expenditures —Capital expenditures will be removed from the base of eligible expenditures for expenditures incurred in 2014 and subsequent years. All other expenditures such as salary and wages, materials, overhead expenses and contract payments remain eligible.
  • Proxy overhead calculation —The prescribed proxy amount will be reduced to 55% (from 65%) of direct labour costs commencing January 1, 2014.
  • Arm’s-length contract payments — Only 80% of the contract payments will be used for purposes of calculating the SR&ED tax credits effective January 1, 2013.
  • Administration — The government will spend $6 million over the next two years to implement changes to the administration of the program through the following measures:
    • Have the CRA conduct a pilot project to determine the feasibility of a formal pre-approval process
    • Enhance the existing online self-assessment eligibility tool
    • Work with industry representatives to address emerging issues
    • Improve the Notice of Objection process to allow for a second review of scientific eligibility determination.


The above initiatives complement the SR&ED policy review project currently underway, which will consolidate and clarify the administrative policies that are contained in about 70 documents pertaining to the SR&ED tax incentive program.

The budget also announced that the government would conduct a study, including consultation with taxpayers, to better understand why companies choose to hire consultants on a contingency fee basis to prepare their SR&ED claims. The result of this study will determine whether any action is required.

Research at universities and other research institutes

R&D is a long-acknowledged driver of economic prosperity and competitiveness, and the prevalent view is that more private investment in R&D will yield significant social benefit. A key driver to the government’s overall innovation strategy is to create new knowledge and a highly skilled workforce. The budget announced that the government will continue to support advanced research at universities and other leading research institutions by providing direct support to granting councils, genomics research, international research and infrastructure investment for Canadian universities, colleges, research hospitals and other not-for-profit research institutes across Canada.


Personal Tax Changes


Old Age Security and Guaranteed Income Supplement

As expected, the budget contains measures affecting seniors’ retirement income.

Eligibility age
The age of eligibility for Old Age Security (OAS) and Guaranteed Income Supplement (GIS) will be gradually increased from 65 to 67, starting April 2023, with full implementation by January 2029. This measure will not affect anyone who is 54 years of age or older as of March 31, 2012. In particular, individuals born on March 31, 1958 or earlier will not be affected. Individuals born on or after February 1, 1962 will have an age of eligibility of 67. Individuals born between April 1, 1958 and January 31, 1962 will have an age of eligibility between 65 and 67.

Option to defer OAS pension
Starting on July 1, 2013, individuals will be allowed to voluntarily defer their OAS pension, for up to five years. These individuals will then receive a higher actuarially adjusted annual pension.

Group sickness or accident insurance plans

The 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 that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis. This measure will not affect the tax treatment of private health services plans or certain other plans.

This measure will apply in respect of employer contributions made on or after March 29, 2012 to the extent the contributions relate to coverage after 2012, except that such contributions made on or after March 29, 2012 and before 2013 will be included in the employee’s income for 2013.

Retirement compensation arrangements

A retirement compensation arrangement (RCA) is a type of employer-sponsored, funded retirement savings arrangement. The budget proposes new prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arm’s length transactions. These rules will be based very closely on existing rules for Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs). As well, the budget proposes a new restriction on RCA tax refunds in circumstances where RCA property has lost value.

The prohibited investment rules will apply for investments acquired or investments that become prohibited investments on or after March 29, 2012. The advantage rules will apply to advantages extended, received or receivable on or after March 29, 2012, including RCA advantages that related to RCA property acquired, or transactions occurring, before March 29, 2012. Transitional rules will apply.

The budget proposes that, if RCA property has declined in value, the RCA tax will be refunded only in circumstances where the decline in value of the property is not reasonably attributable to prohibited investments or advantages, unless the CRA is satisfied that it is just and equitable to refund the tax. This measure will apply in respect of RCA tax on RCA contributions made on or after March 29, 2012.

Employees Profit Sharing Plans

The budget proposes a measure to limit certain employer contributions to Employees Profit Sharing Plans (EPSPs). The proposal introduces a special tax payable by a specified employee on an “excess EPSP amount”.

A specified employee is one who has significant equity interest in the employer or who does not deal at arm’s length with the employer. An “excess EPSP amount” will be the portion of an employer’s EPSP contribution, allocated by the plan trustee to a specified employee, that exceeds 20% of the specified employee’s salary received in the year from the employer.

The special tax will include two components: the first component will be equal to the top federal marginal tax rate of 29%. The second component will be equal to the top marginal rate of the province of the specified employee’s residence (unless the specified employee resides in Quebec, in which case this component will be zero). A new deduction will be introduced to ensure that an excess EPSP amount is not also subject to regular income tax. A specified employee will not be able to claim any other deductions or credits in respect of an excess EPSP amount.

The CRA will have the discretion to waive or cancel the application of this measure if it considers it just and equitable to do so.

This measure will apply to EPSP contributions made by an employer on or after March 29, 2012, other than contributions made before 2013 under a legally binding obligation arising under a written agreement entered into before March 29, 2012.

Mineral Exploration Tax Credit

The Mineral Exploration Tax Credit is available to individuals who invest in flow-through shares. The credit is equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. The budget proposes to extend eligibility for the tax credit for one year to flow-through share agreements entered into on or before March 31, 2013.

Other personal tax measures

Medical Expense Tax Credit
Expenses eligible for the Medical Expense Tax Credit will include blood coagulation monitors for use by individuals who require anti-coagulation therapy, including certain associated items, when they are prescribed by a medical practitioner. This measure will apply to expenses incurred after 2011.

Life insurance policy exemption test
The budget proposes to implement several changes regarding the life insurance policy exemption test which is the test that determines whether a life insurance policy is a tax-exempt policy.

The Investment Income Tax (IIT) on life insurance will be modified where appropriate to neutralize impacts of the proposed technical improvements to the IIT base. The government will consult with key stakeholders on these proposed improvements. Amendments to the tax provisions arising from these consultations will apply to life insurance policies issued after 2013.

Overseas Employment Tax Credit

Currently, employees who are residents of Canada and who qualify for the Overseas Employment Tax Credit (OETC) are entitled to a tax credit equal to the federal tax otherwise payable on 80% of their qualifying foreign employment income, up to a maximum foreign employment income of $100,000.

The budget proposes to phase out the OETC over four years, beginning with 2013. In particular, during the phase-out period, the 80% applied to an employee’s qualifying foreign employment income will be reduced as follows:

  • 60% for 2013
  • 40% for 2014
  • 20% for 2015.

The OETC will be eliminated for 2016 and subsequent years.

The phase-out rules will not apply to qualifying foreign employment income earned by an employee if the employer has committed in writing (e.g., the employer tendered an irrevocable bid in writing for a project) before March 29, 2012. In this case, the 80% will apply for 2013, 2014, and 2015. However, the OETC will be eliminated for 2016 and subsequent years.

Registered Disability Savings Plans

The budget proposes several measures related to registered disability savings plans (RDSPs), including:

Plan holders
Certain family members (spouse, common-law spouse, common-law partner, or parent of the disabled individual) may, on a temporary basis, become plan holders of a registered disability savings plans (RDSPs) for an adult individual who might not be able to enter into a contract. Currently, a plan holder must be either the beneficiary or their guardian or legal representative. This measure applies from the date of Royal Assent of the enacting legislation until the end of 2016.

Proportional repayment rule
Under current rules, Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) paid into an RDSP in the preceding 10 years must be repaid to the government under certain conditions (the “10-year repayment rule”), including when an amount is withdrawn from an RDSP. The budget proposes to introduce a proportional repayment rule that will apply when a withdrawal is made from an RDSP. Generally, for each $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal must be repaid.

Maximum and minimum withdrawals
The budget proposes changes to the maximum and minimum withdrawals from RDSPs. These changes will apply after 2013.

Rollover of RESP investment income
The budget proposes to allow investment income earned in a Registered Education Savings Plan (RESP) to be transferred on a tax-free (or “rollover”) basis to an RDSP if the plans share a common beneficiary, if certain conditions are met. This measure will apply to rollovers of RESP investment income made after 2013.

Termination of RDSP following cessation of eligibility for the disability tax credit
The budget proposes to extend the period for which an RDSP may remain open when a beneficiary becomes disability tax credit-ineligible, i.e., the beneficiary’s condition improves so that he or she becomes ineligible for the disability tax credit (DTC).

To have this measure apply, the plan holder is required to make an election in prescribed form on or before December 31st of the year following the first full calendar year for which the beneficiary is DTC-ineligible. The election will generally be valid until the end of the fourth calendar year following the first full calendar year for which a beneficiary is DTC-ineligible.

This measure will apply to elections made after 2013.

Administrative changes
The budget replaces certain deadlines regarding the administration of an RDSP with a requirement that an RDSP issuer act “without delay” in notifying Human Resources and Skills Development Canada when an RDSP is established or transferred from one RDSP issuer to another.


Business Tax Changes


Eligible dividend designations

The budget proposes to allow a corporation to designate, at the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend. The portion of the taxable dividend that is designated to be an eligible dividend will qualify for the enhanced dividend tax credit for eligible dividends and the remaining portion will qualify for the dividend tax credit for non-eligible dividends.

Under the budget proposal, the CRA will be allowed to accept a late designation of an eligible dividend if the corporation makes the late designation within the three-year period following the day on which the designation was first required to be made.

These measures will apply to taxable dividends paid on or after March 29, 2012.

Tax avoidance using partnerships

Elimitation of section 88 “bump” to partnership interests

The budget proposes changes to limit the application of the section 88 “bump” in the wind-up involving a partnership interest where all the fair market value of the partnership interest is derived from income assets.

Section 88 of the Income Tax Act (the Act) generally permits a taxable Canadian corporation that has acquired control of another taxable Canadian corporation to increase the cost base of certain capital assets acquired by the parent company on a wind-up or vertical amalgamation with the parent. The bump permits the parent to add the amount paid for the shares to the cost of certain assets acquired on the amalgamation or windup, within certain limits.

The bump applies to capital assets, such as land, shares of a corporation or interest in a partnership but does not apply to income producing assets such as eligible capital property, depreciable property, inventory and resource property.

The budget proposes to deny a bump in respect of a partnership interest to the extent that the accrued gain in respect of the partnership interest is reasonably attributable to the amount by which the fair market value of income assets exceed their cost amount.

These rules apply to income assets that are held directly by the partnership or indirectly through another partnership. However, assets directly owned by a taxable Canadian corporation, shares of which are owned by the partnership, will not be considered to be indirectly held by the partnership.

This measure will apply to amalgamations that occur, and wind-ups that begin, on or after March 29, 2012. However, the new measure will not apply where a taxable Canadian corporation amalgamates with its subsidiary before 2013, or begins to wind up its subsidiary before 2012 provided that before March 29, 2012 the corporation had acquired control or was obligated, as evidenced in writing, to acquire control of the subsidiary and the corporation had the intention, as evidenced in writing, to amalgamate with or wind up with the subsidiary.

Partnership disposition to a non-resident
Section 100 of the Act provides that income assets held by a partnership are fully taxable on the sale of the partnership to a tax-exempt person.

The budget proposes to apply section 100 to the sale of a partnership interest to a non–resident person or to an indirect transfer to a non-resident person or a tax-exempt entity. However, this proposal will not apply to the disposition of an interest to a non-resident person if the partnership, immediately before and immediately after the acquisition by the non-resident person, uses all of the property of the partnership in carrying on business through a permanent establishment in Canada.

This measure applies to dispositions of interests in partnerships that occur on or after March 29, 2012, except for arm’s-length dispositions made before 2013 where the taxpayer is obligated pursuant to a written agreement entered into before March 29, 2012.

Partnership waivers
The CRA may not, for a fiscal period of a partnership, make a determination or redetermination of any income, loss, deduction or other amount in respect of the partnership if more than three years have elapsed since the latter of the filings deadline for filing the relevant information return and the day that it is actually filed. However, where a waiver is obtained by the CRA, the period of time for making the determination or redetermination is extended.

The budget proposes that a waiver may be made by one member of the partnership if the member is designated on behalf of all of the partners.

Accelerated CCA for clean energy generation equipment

Waste-fuelled thermal energy equipment
Class 43.2 provides accelerated CCA (50% per year on a declining balance basis) for investment in specified clean energy generation and conservation equipment. Currently, this class includes waste-fuelled thermal energy equipment, subject to the requirement that the heat energy generated from the equipment is used in an industrial process or a greenhouse. The budget proposes to expand Class 43.2 by removing this requirement. As a result, waste-fuelled thermal energy equipment will be able to be used in a wide range of applications, including space and water heating.

District energy system equipment
Certain equipment that is part of a district energy system is currently included in Class 43.1 or Class 43.2. The budget proposes to expand Class 43.2 by adding equipment that is part of a district energy system that distributes thermal energy primarily generated by waste-fuelled thermal energy equipment (that is itself eligible for inclusion in Class 43.2).

Energy generation from residue of plants
Currently, subject to certain requirements, equipment that uses plant residues to produce biogas or bio-oil is currently eligible for inclusion in Class 43.2. The budget proposes to add the residue of plants to the list of eligible waste fuels that can be used in waste-fuelled thermal energy equipment included in Class 43.2 or a cogeneration system included in Class 43.1 or Class 43.2.

Environmental compliance
The budget proposes that equipment using eligible waste fuels not be eligible under Class 43.1 or Class 43.2 if environmental laws and regulations are not complied with at the time the equipment first becomes available for use.

These measures apply to assets acquired on or after March 29, 2012 that have not been used or acquired for use before this date.

Corporate Mineral Exploration and Development Tax Credit

The budget proposes to phase out the corporate tax credit for pre-production mining expenditures. Currently, a tax credit of 10% is available. The credit will apply at a rate of 10% for exploration expenses incurred in 2012, and at a rate of 5% for expenses incurred in 2013. The credit will not be available for exploration expenses incurred after 2013.

The corporate tax credit will apply at a rate of 10% for pre-production development expenses incurred before 2014, at a rate of 7% for expenses incurred in 2014, and a rate of 4% for expenses incurred in 2015. The credit will not be available for pre-production development expenses incurred after 2015. However, transitional relief is provided in certain circumstances.

Atlantic Investment Tax Credit (AITC)

Oil and gas and mining activities
The budget proposes to phase out the 10% AITC for oil and gas and mining activities over a four-year period. The AITC will apply at a rate of 10% for assets acquired before 2014 for use in certain oil and gas and mining activities (a list of activities is provided in the budget document), at a rate of 5% for such assets acquired in 2014 and 2015. The AITC will not be available for such assets acquired after 2015. However, transitional relief is provided in certain circumstances.

Electricity generation equipment
Certain equipment is eligible for the AITC if the equipment is “qualified property”. The budget proposes amendments so that qualified property will include certain electricity generation equipment and clean energy generation equipment used primarily in an eligible activity. In general, and subject to certain requirements, qualified property will include electricity generation equipment described in Class 17 or 48 and clean energy generation and conservation equipment described in Class 43.1 or 43.2.

This measure will apply to assets acquired on or after March 29, 2012 that have not been used or acquired for use before this date, except that the measure will not apply to acquisitions of assets that are used primarily in oil and gas or mining activities.

Hiring credit for small business

Last year’s budget introduced a temporary Hiring Credit for Small Business of up to $1,000 per employer. The 2012 budget proposes to extend this temporary credit for one year. In particular, a credit of up to $1,000 against a small employer’s increase in its 2012 Employment Insurance premiums over those paid in 2011 will be provided.

Taxation of corporate groups

In the 2010 federal budget, the government announced that it was going to explore whether new rules for the taxation of corporate groups, including tax loss consolidation or loss transfer rules, should be considered to improve the functioning of the corporate tax system. Public consultations were held between November 2010 and April 2011 and the government has indicated that discussions with applicable stakeholders, including the provinces and territories, are ongoing.


International Tax Changes


Thin capitalization rules

The budget proposes a series of measures that impact the thin capitalization rules.

Reduction of debt-to-equity ratio from 2:1 to 1.5:1

The thin capitalization rules limit the interest expense deduction of a Canadian resident corporation where the amount of debt owing to certain non-residents exceeds a 2:1 debt-to-equity ratio. These rules apply to debts owing to a specified shareholder that is not resident in Canada and any other non-resident who does not deal at arm’s length with the non-resident. A specified shareholder is generally viewed as owning shares representing more than 25% of the votes or value of the corporation.

The budget proposes that the debt-to-equity ratio be reduced to 1.5:1 for all corporate taxation years that begin after 2012.

Inclusion of partnership debt in the debt-to-equity ratio

Currently, the thin capitalization rules only apply to Canadian resident corporations. The budget proposes to extend these rules to apply to debts owed by partnerships of which a Canadian resident corporation is a member.

In this situation, the debt of the partnership will be allocated to its Canadian resident corporation members based on their proportionate interest in the partnership. These debts will then be included in the corporation’s debt-to-equity ratio under the thin capitalization rules.

Where this calculation results in an amount of non-deductible interest that is related to the debt allocated from the partnership, an amount equal to the interest on the portion of the allocated partnership debt that exceeds the permitted debt-to equity ratio will be required to be included in computing the income of the Canadian resident corporation that is a member of the partnership. The inclusion will be treated as either business or property income and the source of this inclusion will be determined by reference to the source against which the interest is deductible at the partnership level.

This measure is applicable in respect of debts of a partnership that are outstanding during corporate taxation years that begin on or after March 29, 2012.

Interest disallowed in the debt-to-equity ratio treated as dividends

The budget proposes to recharacterize the disallowed interest expense from the application of the thin capitalization rules as a dividend for non-resident withholding tax purposes. This recharacterization includes an amount that is required to be included in computing the income of a corporation in respect of a disallowed interest expense of a partnership.

The budget proposes that any disallowed interest expense of a corporation will be allocated to specified non-residents in proportion to the corporation’s debt owing in the taxation year to all specified non-residents, including debts owing by the partnerships of which a corporation is a member. Withholding tax will then apply to the deemed dividend allocation. Withholding taxes on deemed dividends are due when applicable withholding taxes on interest payments are otherwise due. The corporation may allocate the disallowed interest expense to the latest interest payments made to any particular specified non-resident in the taxation year. Where the interest expense has not been paid by the end of the taxation year, the disallowed interest expense will be deemed to have been paid as a dividend to that specified non-resident at the end of the taxation year.


This measure applies to taxation years that end on or after March 29, 2012.

Foreign affiliate loans
The budget proposes that the thin capitalization rules will not include the interest expense of a Canadian-resident corporation that relates to interest that is taxable to the Canadian resident corporation as Foreign Accrual Property Income of a controlled foreign affiliate of the corporation.

This measure applies to taxation years of a Canadian resident corporation that end on or after March 29, 2012.

Foreign affiliate dumping

“Foreign affiliate dumping” is a term applied to certain transactions whereby a Canadian subsidiary uses borrowed funds to acquire shares of a foreign affiliate from its foreign parent, obtains an interest expense deduction in Canada on the borrowing and at the same time is eligible to receive exempt surplus dividends on the shares of the foreign affiliate that are exempt from taxation in Canada.

Certain transactions that could also be viewed as foreign affiliate dumping include:


  • Acquisitions of shares of a foreign affiliate that are made with internal funds of a Canadian subsidiary, which are viewed as an extraction of funds from the Canadian subsidiary free of Canadian withholding tax
  • Acquisitions of newly issued shares of a foreign affiliate where previously issues shares of the foreign affiliate are owned by the foreign parent or another non-resident member of the same corporate group
  • Acquisitions of foreign affiliate shares from a foreign subsidiary of the foreign parent
  • Acquisitions of foreign affiliate shares from an arm’s-length party at the request of the foreign parent.


The budget proposes the following:

  • Where certain conditions are met, a dividend will be deemed to be paid by a Canadian subsidiary to its foreign parent to the extent of the value of any non-share consideration given by the Canadian subsidiary for the acquisition of the shares of the foreign affiliate. Any deemed dividend will be subject to non-resident withholding tax.
  • Furthermore, it is proposed that paid-up capital of any shares of the Canadian subsidiary that are given as consideration by the parent will be disregarded.

These rules will not apply to transactions that meet a "business purpose test". The factors to be considered in applying this test will be non-tax factors and are intended to assist in determining whether it is reasonable to conclude that the investment in, and ownership of, the foreign affiliate belongs in the Canadian subsidiary more than in any entity in the foreign parent’s group. The government will receive submissions concerning the details of the proposed “business purpose test” before June 1, 2012.

This measure will 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 and that are obligated to complete the transaction pursuant to a written agreement entered into before March 29, 2012.


Related paid-up capital suppression rules will apply in corporate immigrations and emigrations.


The budget indicates that the government intends to monitor further developments in this area.

Base erosion test—Canadian banks

The budget proposes that amendments will be developed on the so-called “Base Erosion Test” of the foreign accrual property income regime as it applies to Canadian banks. Specifically, amendments will be developed to alleviate the tax cost to Canadian banks of using excess liquidity of their foreign affiliates in their Canadian operations. Also, amendments will be developed to ensure that certain transactions that form part of a bank’s business of facilitating trades for arm’s-length customers are not caught by the base erosion test.

These amendments will be developed with industry representatives.

Transfer pricing adjustments

The transfer pricing rules that generally govern the transactions or series of transactions between parties who do not deal at arm’s length are provided in section 247 of the Act.

Once an adjustment to the transfer price is made for income tax purposes by the CRA to reflect arm’s-length terms and conditions (commonly referred to as a “primary adjustment”), a resulting adjustment is generally required to account for the part of the transaction which was not deemed to made at acceptable transfer pricing terms. This part of the transaction is generally referred to as the “secondary adjustment” and is viewed as a benefit conferred on the non-residents participating in the transaction.

It is proposed that section 247 of the Act be amended to confirm that the secondary adjustment be treated as a dividend for purposes of non-resident withholding tax Part XIII of the Act, with the result that related withholding tax will apply. Further, when such an adjustment is applicable, the Canadian corporation subject to the primary adjustment will be deemed to have paid a dividend to each non-arm’s length non-resident that is part of the transactions in proportion to the amount of the primary adjustment that relates to that non-resident. This rule specifically applies regardless of whether the non-resident person is a shareholder of the Canadian corporation.

If a non-resident repatriates to the Canadian corporation an amount equal to its portion of the primary adjustment, and if the repatriation is made with the concurrence of the CRA, no deemed dividend will arise if the non-resident is a controlled foreign affiliate of the Canadian corporation.

These proposals will apply to transactions and series of transactions that occur on or after March 29, 2012.


Indirect Tax Changes


GST/HST streamlined accounting thresholds

Most small businesses and most public service bodies (PSBs) can elect to use the Quick or Special Quick Method of accounting respectively to determine the amount of GST/HST to remit. Most small businesses and most PSBs can also elect to use the Streamlined Input Tax Credit Method, which provides a simplified process for determining input tax credits (ITCs).

The budget proposes to double the existing thresholds for this streamlined accounting as follows:

  • The annual taxable sales threshold at or below which eligible businesses can elect to use the Quick Method will increase to $400,000 (from $200,000) of GST/HST-included taxable sales
  • The annual taxable sales and taxable purchases thresholds at or below which eligible businesses or PSBs can elect to use the Streamlined Input Tax Credit Method and eligible PSBs can elect to use the Prescribed Method for Calculating Rebates will increase:
    • To $1 million (from $500,000) of taxable sales, and
    • To $4 million (from $2 million) of taxable purchases.

This measure will be effective in respect of a GST/HST reporting period of a person (or a claim period of a person, in the case of the Prescribed Method for Calculating Rebates) beginning after 2012.

GST/HST health measures

The budget proposes changes to improve the application of GST/HST to a number of health care services, including pharmacists’ services, corrective eyewear and certain medical devices and drugs


GST rebate for books

The budget proposes to allow charity and qualifying non-profit literacy organizations to claim a rebate of the GST and the federal portion of the HST they pay to acquire printed books to be given away.

This measure will apply to acquisitions and importations of printed books in respect of which tax becomes payable after March 29, 2012.

Travellers’ exemptions

The budget proposes to increase the travellers’ exemption to:

  • $200 (from $50) for returning Canadian residents who are out of the country for 24 hours or more.
  • $800 for travellers who are out of the country for 48 hours or more. This new $800 threshold will replace the current 48-hour exemption of $400 and the current seven-day exemption of $750.

The new exemption levels will be effective for travelers returning to Canada on or after June 1, 2012.

Foreign-based rental vehicles temporarily imported

The budget proposes changes to the tax treatment of foreign-based rental vehicles temporarily imported by Canadian residents. The budget proposes to fully relieve GST/HST on foreign-based rental vehicles temporarily imported by Canadian residents who have been outside Canada for at least 48 hours, among other changes. These measures will apply to foreign-based rental vehicles temporarily imported by Canadian residents on or after June 1, 2012.

Green levy on fuel-inefficient vehicles

The Green Levy applies to certain fuel-inefficient vehicles. To ensure that recent changes to vehicle fuel consumption testing requirements do not affect the application of the Green Levy, the budget proposes amendments so that the weighted average fuel consumption rating for the purposes of the Green Levy continues to be determined by reference to the current test method. These amendments will apply on Royal Assent to the enacting legislation.

Tariff on imported oil

The budget proposes to eliminate the 5% Most-Favoured-Nation (MFN) rate of duty on certain imported oils used as production inputs in gas and oil refining as well as electricity production. This tariff elimination will be effective in respect of goods imported on or after March 30, 2012.


Charities Changes


The 2012 budget contains several tightening measures affecting charities, including the following.

Gifts to foreign charitable organizations

In general, donations made by Canadians to foreign charities are not eligible for the charitable donation tax credit or deduction. However, certain foreign charitable organizations may register as a qualified donee. The 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 or urgent humanitarian aid or that are in Canada’s national interest. The CRA will develop guidance regarding the administration of this proposal.

Foreign charitable organizations that have received qualified donee status under the existing rules will continue to be qualified donees until the expiration of the period of their current status.

This measure will apply to applications made by foreign charitable organizations on or after the later of January 1, 2013 and Royal Assent of enacting legislation.

Enhancing charities’ transparency and accountability

Political activities
A charity is allowed to engage in political activity as long as the activities represent a limited portion of its revenues, are non-partisan and are ancillary and incidental to its charitable purposes and activities. The government is concerned that charities may be exceeding these limitations. Further, there is currently no requirement for a charity to disclose the extent to which it receives funding from foreign sources for political activities.

As a result, the budget proposes to provide the CRA with additional enforcement tools. In particular, the CRA will be allowed to suspend the tax receipting privileges of a charity that exceeds the limitations on political activities for one year. As well, the CRA will be able to suspend the tax-receipting privileges of a charity that provides inaccurate or incomplete information in its annual information return until the charity provides the required information.

Funding political activities
Where a gift is made by a charity and it can reasonably be considered that the purpose of the gift is to support the political activities of a qualified donee, the gift will be considered to be an expenditure made by the charity on political activities.

These measures will also apply to registered Canadian amateur athletic associations. These measures will be effective on Royal Assent to the enacting legislation.


Administrative Measures


Tax shelters

The budget proposes the following measures to encourage tax shelter registration and reporting:

Promoter penalty on charitable donation tax shelters
Currently, the promoter penalty on charitable donation tax shelters is the greater of $500 and 25% of the consideration received/receivable for the tax shelter. The budget proposes that, in the case of a charitable donation tax shelter, the penalty will be the greater of the amount under existing rules and 25% of the amount asserted by the promoter to be the value of the property that participants in the tax shelter can transfer to a donee. This measure will apply on Royal Assent to the enacting legislation.

Unreported tax shelter sales
Currently, the penalty for not filing an annual information return on time is the greater of $100 and $25 multiplied by the number of days that the return is outstanding, to a maximum of $2,500. The budget proposes an additional penalty on a promoter who fails to either file an annual information return in response to a demand by the CRA to file the return or report in the return an amount paid by a participant in the tax shelter.

The new penalty will be equal to 25% of the consideration received or receivable by a promoter from all interests in the tax shelter that should have been, but were not, reported in the annual information return. Alternatively, in the case of a charitable donation tax shelter for which the amounts paid by the participants are not reported, the greater of 25% of the consideration received/receivable by the promoter and the amount asserted by the promoter to be the value of the property that those participants can transfer to a donee.

In the case of a failure to file an information return when the CRA demands the filing of the return, the proposed measure will be effective after Royal Assent to the enacting legislation. In the case of the failure to report in an annual information return an amount paid by a participant, the proposed measure will apply to returns filed after Royal Assent to the enacting legislation.

Tax shelter identification numbers
Currently, a tax shelter number does not have an expiration date. The budget proposes that a number be valid only for the calendar year identified in the application for the number filed with the CRA. This measure will apply to applications made on or after March 29, 2012. Tax shelter identification numbers issued as a result of applications made before March 29, 2012 will be valid until the end of 2013.

2012 Federal Budget Highlights (KPMG)

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Sunday, March 25, 2012

Directors' Liability: Execution Against Primary Debtor

Directors' Liability: Execution Against Primary Debtor

In Barrett (2012 FCA 33), the minister sought to enforce a GST assessment against a director in his personal capacity. On the basis of the wording of the statute and case law, the FCA concluded that the minister is not obliged to make "reasonable" efforts to collect a GST debt from a corporation before he takes action against any director. The minister need only act in good faith.

Mr. B was a director of a corporation that had failed to remit GST for a period in the 1990s. The corporation ceased to carry on business, and Mr. B withdrew funds from the corporate account for his personal use. The minister registered a certificate in the FC in 1998 against the corporation and immediately obtained a writ of seizure and sale, which in 2000 he directed the sheriff to execute. The sheriff returned a nulla bona report to the minister. In 2002, the minister assessed Mr. B in his personal capacity in order to satisfy the corporate GST debt.

The TCC (2010 TCC 298) concluded that the minister's efforts to collect the GST debt from the corporation were relevant to the question of whether reasonable efforts were made to execute the writ. The court relied on its earlier comments in Miotto (2008 TCC 128) to conclude that in determining whether reasonable efforts were made, one must examine the entire execution process, including the steps the CRA took to search for assets and instruct the sheriff. The TCC said that because the minister failed to search for the corporate bank account, he had not made reasonable efforts to execute the writ against the corporation before he initiated action against the director. Thus, the court held that the requirements of ETA paragraph 323(2)(a) were not met, and it vacated the assessment against Mr. B.

ETA paragraph 323(2)(a) provides that before the director of a corporation can be held liable for its GST debt, a certificate for the liability's amount must be registered in the FC and the execution for that amount must be returned partially or wholly unsatisfied. On the appeal in Barrett, the FCA said that there was nothing in the provision's text that requires the minister to take reasonable steps to search for corporate assets before seeking to execute a writ. Instead, the FCA said that the rules of the federal court that issued the writ will establish the standards that govern the writ's execution.

The FCA then considered the FC rules and concluded that nothing in those rules requires a judgment creditor to make reasonable efforts to search for assets before instructing the sheriff to seek to collect the debt. The FCA acknowledged that the rules are complemented by provincial execution laws regarding writs, but said that nothing in the Ontario statutes or the rules of civil procedure requires a judgment creditor to make reasonable efforts to search for assets.

Thus, the FCA also considered the legal context and purpose of ETA paragraph 323(2)(a) and concluded that none of the administration or enforcement provisions of the ETA assist in ascertaining whether the minister must make reasonable efforts to search for corporate assets. Instead, those provisions confirm that a director's liability arises not merely from an ordinary debt, but from an obligation in respect of money collected from third parties and held in trust for the government of Canada. A director has the power to ensure that a corporation makes its remittances, but he can exculpate himself from personal liability if he can demonstrate his due diligence. Nothing in the relationship between a corporation and its directors is consistent with the proposition that the minister must take reasonable steps to search for the corporation's assets before taking action against directors. This is particularly so in cases where the director can be indemnified from existing corporate assets: a director who has been held liable for a GST debt has the same preferential rights as the minister over other creditors to be indemnified through the corporation's remaining assets.

The FCA also examined whether the trial judge concluded correctly that Miotto imposed a burden on the minister to make reasonable efforts to locate the corporation's assets and direct the sheriff accordingly. The TCC in Barrett had relied on an excerpt from Miotto that referred to the CRA's reasonable belief that the primary debtor had no assets, but immediately went on to say that the "execution of a writ . . . requires reasonable efforts on the part of the bailiff. It does not require perfection." The FCA said that further comments in Miotto--concerning the CRA collection officer's reasonable belief and the inappropriateness of the directors' criticizing the CRA for failing to find items that they had hidden--pointed to a simple good faith requirement on the minister's part.

Thus, the FCA concluded that the TCC had erred in finding that ETA paragraph 323(2)(a) imposed an obligation on the minister to make reasonable efforts when directing the sheriff and searching for corporate assets. At the most, the minister's obligation in seeking to execute a writ is to act in good faith. As the FCA suggested concerning the directors who spirited away assets in Miotto, it is difficult to sympathize with Mr. B's attempt to exculpate himself from personal liability as a director by criticizing the minister for not finding the money (before Mr. B spent it) that had been held in trust for the Crown in the corporation's bank account.

John Sorensen and Steve Novoselac
Gowling Lafleur Henderson LLP, Toronto

  Canadian Tax Highlights
Volume 20, Number 3, March 2012
©2012, Canadian Tax Foundation

Pooled Registered Pension Plans, Part 2

Pooled Registered Pension Plans, Part 2

Pooled registered pension plans (PRPPs) are intended to provide a new retirement savings option that is attractive to smaller employers and the self-employed. Bill C-25, An Act Relating to Pooled Registered Pension Plans and Making Related Amendments to Other Acts (also referred to as the Pooled Registered Pension Plans Act) was introduced on November 17, 2011 to implement PRPPs. On December 14, 2011, Finance released income tax legislative proposals for PRPPs that apply to both federally and provincially regulated PRPPs. Last month ("Pooled Registered Pension Plans, Part 1," Canadian Tax Highlights, February 2012) we offered an overview of PRPPs and discussed the tax rules that apply to individual and employer PRPP contributions. This article discusses investments and investment income of a PRPP, payments therefrom, and transfers between a PRPP and other registered retirement plans.

Investments. An administrator is responsible for investing a PRPP's assets. Although the assets are combined for investment purposes, each member has a personal account and, upon enrolling in the plan, can make investment choices from those options offered by the administrator. A member bears the investment risk, just as in any other defined contribution arrangement. Investments in PRPPs need not conform to RRSP "qualified investment" rules, but the investments are subject to restrictions that are intended to prevent an administrator from participating in an arrangement that may be used (1) to circumvent PRPP contribution limits, or (2) in the case of an older individual member, to reduce the value of the PRPP account in order to avoid or lower required RPP payments in retirement. A PRPP must take reasonable precautions to avoid (1) the acquisition of investments in which a member has a significant interest (generally more than 10 percent of a class of a corporation's shares or of a partnership's or trust's units, including interests held by all non-arm's-length parties); and (2) the concentration of more than 10 percent of the plan's assets in one business or non-arm's-length group. A small PRPP (generally, one with fewer than 10 unrelated employers participating) must also avoid holding investments in the participating employers.

Investment income. The investment income earned in a PRPP must be allocated to the member's account annually (or more frequently). The earnings in, as well as the contributions made to, the PRPP are tax-exempt until they are paid out of the PRPP, but that exemption does not extend to income from a business that is carried on by the PRPP.

Payments and transfers during a member's life. Funds in a PRPP are generally covered by locking-in rules similar to those applicable to an RPP. Subject to these rules, payments from a PRPP are generally included in the individual's income and are eligible for the pension tax credit and pension income splitting. Payments made to a non-resident are subject to withholding tax. The existing transfer rules for a defined contribution RPP (governing transfers between an RPP and another RPP, an RRSP, a RRIF, and certain other registered plans) generally apply to a PRPP. Employee and employer contributions to a PRPP (other than certain transfers) must cease by the end of the year in which the member turns 71, at which time the payment options to the member mirror those for a defined contribution RPP. The PRPP funds can be (1) paid as a single, non-periodic payment; (2) used to purchase a life annuity for the member; or (3) paid as variable benefits (RRIF-type payments).

Payments and transfers upon the member's death. Generally, the funds in a PRPP are included in income for the deceased member's last taxation year. However, as indicated in the table, if the deceased had directed that the funds be distributed to a "qualifying person"--a spouse or an infirm dependant--the transfer of funds is tax-deferred or included in the transferee's income.

PRPP Funds
  Tax-deferred transfer?
Fund transfer options Surviving spouse
or common-law
Infirm financially
dependent child
or grandchild
Become a successor member,
assume ownership of PRPP
Yes No
Transfer to one's own RRSP,
Yes Yes
Acquire a qualifying annuity Yes Yes
Transfer to registered disability
savings plan (RDSP) to the extent
of available contribution room
No Yes

Ken Griffin
PricewaterhouseCooopers LLP, Toronto

John Hnatiw
PricewaterhouseCoopers LLP, Mississauga

  Canadian Tax Highlights
Volume 20, Number 3, March 2012
©2012, Canadian Tax Foundation


New US Reporting for Foreign Assets

Beginning with his 2011 tax return, a US citizen or resident who owns certain specified foreign financial assets (SFFAs) has a new US tax filing obligation, form 8938 ("Statement of Specified Foreign Financial Assets"). Most US citizens who are Canadian residents are already familiar with FBAR reporting of foreign bank and financial accounts on form TD F 90.22-1: reporting is required annually if the aggregate value of those accounts exceeds $10,000 during the tax year. Now, in addition to the FBAR, certain US individuals must file form 8938 with their US tax returns to report certain detailed information about the taxpayer's SFFAs (Code section 6038D, enacted with FATCA).

An SFFA includes many types of non-US financial accounts that are also reported on the FBAR, but the definition of an SFFA is broader than the definition of a foreign financial account for FBAR purposes. SFFAs include other foreign financial assets held for investment that are not in an account--namely, stock or securities of non-US issuers, any interest in a non-US entity, and any financial interest or contract that has a non-US issuer or counterparty.

For 2011, only specified individuals must file form 8938--a US citizen; a resident alien of the United States for any part of the tax year (even if he elects to be a non-resident under a treaty's residence tie-breaker rules); a non-resident alien who makes an election to be treated as a resident alien for the purposes of filing a joint US tax return; and, in some cases, a resident of a US possession. Proposed regulations have been issued that require form 8938 reporting by certain US entities for taxable years beginning after December 31, 2011. However, if a person is not required to file a US income tax return for the year, form 8938 is also not required.

A significant and favourable difference distinguishes form 8938 from the FBAR: form 8938 reporting thresholds are more generous and take into account both the taxpayer's filing status and his residence. For a taxpayer who lives in the United States and files a return other than a joint return, form 8938 reporting is required if the total value of his SFFAs for the year is $50,000 on the last day of the tax year or $75,000 at any time during the tax year; these thresholds increase to $100,000 and $150,000, respectively, for taxpayers who file jointly. For a taxpayer who lives outside the United States and files a return other than a joint return, the thresholds are $200,000 and $300,000, respectively, and $400,000 and $600,000, respectively, for taxpayers who file jointly. When compared with the $10,000 threshold for FBAR filing that applies regardless of residence, the reporting thresholds for form 8938 reflect a more practical approach on the part of the United States.

To qualify as living abroad for purposes of the higher filing thresholds, the individual's tax home must be in a foreign country and he must meet the same presence-abroad test that was established for the "foreign earned income" exclusion: the individual either has been a bona fide resident of a foreign country for an entire tax year or has been present in a foreign country for at least 330 full days during any 12 consecutive months that ends in the tax year being reported.

If an individual would otherwise be required to file form 8938 and has an SFFA that is reported on another US information return (such as form 3520, 3520-A, 5471, 8865, or 8891), the asset need not be reported on form 8938, but the value must be included in the determination of whether the threshold for filing form 8938 is met. Part IV of form 8938 must also be completed to disclose which and how many such other information returns report the particular SFFA.

The information that must be disclosed on form 8938 depends on the particular type of asset, but it generally includes basic identification of the account or asset; the name and address of the financial institution or the issuer or counterparty of stock, securities, or financial assets; the maximum value of the account or asset during the year; whether the account or asset was acquired or disposed of during the year; the amount of income, gain, loss, or other item recognized during the year and the schedule, form, or return on which it is reported to the IRS; and the currency exchange rate used. In addition, with respect to interests in foreign entities, form 8938 must disclose whether the foreign entity is a passive foreign investment company.

Non-compliance with the new form 8938 reporting requirements can have severe consequences. The penalty for failing to file form 8938 or to accurately report SFFAs is a minimum of $10,000. If the taxpayer does not file a correct and complete form 8938 within 90 days after the IRS mails a notice of failure to file, the penalty is increased by $10,000 for each 30-day period of non-compliance, up to a $50,000 maximum. Reasonable cause may be asserted to avoid the penalty only if the taxpayer affirmatively shows the facts that support that claim. A foreign law, whether civil or criminal, that restricts disclosure of the information that must be reported on form 8938 is not reasonable cause.

In addition, if a taxpayer underpays his US tax as a result of a transaction that involves an undisclosed foreign financial asset, the accuracy-related penalty is increased from 20 percent to 40 percent. Failure to file form 8938 can cause the limitation period to remain open for the income tax return with which the form should have been filed. If a taxpayer fails to file form 8938 or fails to report an SFFA, the limitation period for all or part of a taxpayer's US return for the tax year remains open until three years after a complete and accurate form 8938 is filed. Moreover, if on his tax return a taxpayer omits more than $5,000 gross income that relates to an SFFA, the limitation period is extended to six years from the date on which the return is filed.

It is clear that the IRS is serious about collecting more information on foreign financial assets that are held by US persons, as evidenced by the new form 8938 reporting, the IRS's FBAR enforcement efforts, and the impending FATCA regime that applies to non-US financial institutions with US clients. In light of the significant penalties associated with form 8938 reporting, the breadth of the information to be reported, and the compliance issues that many US citizens in Canada have faced with respect to FBAR reporting, a US taxpayer should carefully review new form 8938 and the regulations issued under Code section 6038D to determine whether he must file form 8938 with his 2011 US tax return.

Jessica S. Wiltse
Hodgson Russ LLP, Buffalo

  Canadian Tax Highlights
Volume 20, Number 3, March 2012
©2012, Canadian Tax Foundation

Wednesday, March 21, 2012

Highlights of the 2012 Quebec Budget

March 20, 2012 No. 2012-11 Highlights of the 2012 Quebec Budget Quebec Minister of Finance and Minister of Revenue, Mr. Raymond Bachand, tabled the Quebec provincial budget for 2012-2013 earlier today. The government announced that the deficit would be $3.3 billion for 2011-2012 and $1.5 billion for 2012-2013. The budget is expected to be balanced in 2013-2014. The Minister indicated that the government will intensify its actions against tax evasion, allocating increased resources to that initiative. Following are the highlights of the 2012 Quebec budget. Business Tax Purchase of shares of a labour fund by employers for the benefit of their employees The value of the taxable benefit related to amounts paid by an employer to acquire a share or fraction of a share issued by the Fonds de solidarité FTQ or Fondaction for the benefit of employees will be excluded from the base wages of employees for Quebec payroll tax purposes. Reduction in contributions to the Health Services Fund In order to counter the decline in Quebec’s working-age population attributable to the aging of the population, the budget provides for a reduction in the contributions to the Health Services Fund of private-sector employers who employ workers aged 65 or over. This new incentive is introduced to encourage private-sector employers to hire or keep such workers. This new measure, which will take the form of a reimbursement starting in 2013, will be worth up to $400 in 2013 per employee, $500 in 2014, $800 in 2015 and $1,000 afterward. This measure is in addition to the tax credit previously announced by the government in the 2011-2012 budget and is designed to eliminate the tax payable by persons aged 65 or over on part of their earned income in excess of $5,000. Public transportation organized by employers In order to encourage employers to cover part of the cost of public transit use of their employees, the government introduced two fiscal measures in the past to encourage the set-up of workplace programs that promote the regular use of public transit. The first measure allows for a deduction in the calculation of the employer’s income, of an additional amount equal to 100% of the amount otherwise deductible for reimbursements paid to employees for the cost of an eligible transit pass (eligible transit passes are provided by a public entity authorized by law to organize such a service), or for the cost of transit passes supplied to employees. Under the second measure, the value of the benefit received from their employer will not be included in the employees’ income. Since these services are still insufficient in some regions of Quebec, or even non-existent, amendments will be made to the tax legislation so that intermunicipal public transportation services organized by an employer, alone or jointly with other employers, for a large number of employees receive a similar tax treatment. More specifically, the employer may deduct, in the calculation of its income, an additional amount equal to 100% of the amount otherwise deductible for the setting up and operation of such a service. Employees will not be required to include the value of the benefits in the calculation of their income. These measures will be effective for 2012 taxation years. Extension of the refundable tax credit for labour training in the manufacturing, forestry and mining sectors This refundable tax credit is equal to 30% of eligible training expenditures incurred for employees before January 1, 2012. Considering the benefits arising from this tax credit for eligible employees who participate in training activities as well as for the businesses that benefit from them, the tax legislation will be amended to extend the refundable tax credit until December 31, 2015 under the same terms and conditions. Changes to the refundable tax credits for multimedia titles and for corporations specialized in the production of multimedia titles The 1996 budget introduced the refundable tax credit for multimedia titles and, in 1998, a second refundable tax credit applying specifically to corporations whose activities consist essentially in producing such titles was introduced (the Refundable Tax Credit for Corporations Specialized in the Production of Multimedia Titles). There are certain differences between the two tax credits, in particular with respect to certificates that are required and the way the amount of tax assistance is determined. Both of these tax credits will be changed to simplify their application. Accordingly, amendments to the tax legislation as well as to the sectoral parameters will be made in relation to the categorization of multimedia titles (including the withdrawal of the notion of titles resulting from an order), the specialized corporation certificate, the rules applicable to subcontracting, and eligible production work. In regards to the specialized corporation certificate, the condition requiring that all or almost all of the activities a corporation carries out in Quebec consist in producing eligible multimedia titles will be changed so that a corporation may obtain a specialized corporation certificate if 75% of the activities are eligible activities. This change is made to take into consideration all the other activities carried out in the normal course of carrying on a business. These changes will apply to a certification application filed with Investissement Québec after March 20, 2012 regarding a given taxation year ending after that day. Improvement to the investment tax credit relating to manufacturing and processing equipment The tax legislation will be amended so that property used primarily in the course of ore smelting, refining or hydrometallurgy activities other than ore from a gold or silver mine, extracted from a mineral resource located in Canada, may qualify as qualified property for the purposes of the investment tax credit. To qualify, such property must be acquired after March 20, 2012 and before January 1, 2018, in addition to satisfying the other conditions stipulated by the tax legislation. Introduction of fiscal measures to encourage the creation of new financial services corporations The budget introduces two new refundable tax credits for a period of five years in order to encourage the creation of new corporations in the financial services sector. The refundable tax credit for the hiring of employees by a new financial services corporation will represent 30% of the eligible salary that an eligible corporation pays to its eligible employees during a taxation year included in the five-year period of eligibility for this fiscal measure, but the credit will be limited to $30,000 per eligible employee on an annual basis. The refundable tax credit relating to a new financial services corporation will represent 40% of the eligible expenditures (essentially expenses related to the regulatory environment, to a participation in a stock exchange or to financial analysis or research services) that an eligible corporation pays during a taxation year included in this same five-year period but will be limited to $150,000 on an annual basis. Additionally, the budget provides a five-year tax holiday for foreign specialists whose duties will consist in carrying out specific activities with an eligible corporation under an employment contract entered into after March 20, 2012 as an expert in the field of finance. This tax holiday will consist of a deduction in the calculation on the employee’s taxable income and will generally correspond to a percentage of his salary. Introduction of a refundable tax credit pertaining to the diversification of markets of Quebec manufacturing companies The budget introduces a new refundable tax credit on a temporary basis in order to support Quebec manufacturing companies that want to commercialize their products in markets outside Quebec. An eligible corporation (i.e., a corporation at least 75% of the activities of which are described in specific NAICS codes for the year) that obtains an eligibility certificate after March 20, 2012, may receive a refundable tax credit equal to 30% of the eligible certification expenses it incurs regarding an eligible product that day but before January 1, 2016, up to a maximum of $45,000. Changes to the refundable tax credit for resources The budget provides a 10 percentage point reduction in the tax credit rate on eligible expenses for resources available to corporations that develop no mineral resource, oil or natural gas well. The rate of the tax credit available to such corporations regarding eligible expenses relating to other natural resources will be reduced by five percentage points. Regarding other corporations for which tax credits are available concerning eligible expenses relating to mining resources, oil or natural gas and other natural resources, the budget provides that the rate will be reduced by five percentage points. The rates relating to renewable energy and energy savings will not be changed. Additionally, the budget provides that an eligible corporation planning to incur exploration expenses in the mining, oil or gas field may claim an increase in the tax assistance in exchange for an option in favour of the Quebec government to acquire an equity stake in the development which will be managed by Resources Québec. More specifically, for corporations that develop no mineral resource, oil or natural gas well, the budget provides an increase of 10 percentage points for eligible expenses relating to mining resources, oil and natural gas and an increase of five percentage points for eligible expenses relating to other natural resources. For other corporations, the budget provides an increase of five percentage points for the aggregate eligible expenses. These changes will apply regarding eligible expenses incurred after December 31, 2013. Recognition of an eligible public research centre The budget provides the recognition of the Institut national de santé publique du Québec as a new eligible public research centre for the refundable tax credit for scientific research and experimental development. This recognition will apply after December 3, 2011. Measures pertaining to tourism A temporary refundable tax credit of up to $175,000 per taxation year is introduced in order to increase private investment and the development of Quebec’s tourism potential. This credit will be granted to corporations that own a hotel establishment, a tourist home, a resort, a bed and breakfast establishment or youth hostel located in Quebec, outside the Montreal and Quebec metropolitan areas, and that carry out renovation or improvement work on their establishment. In order to be eligible, corporations must in particular have a gross revenue of at least $100,000 for the given taxation year or immediately preceding taxation year and assets for such preceding taxation year of at least $400,000. Corporations that are members of a partnership may also benefit from the tax credit under similar conditions. The tax credit is equal to 25% of the portion of the eligible expenditures incurred in the year to carry out eligible work that exceeds $50,000. Eligible expenditures correspond to the total of the amounts representing the cost of labour supplied by the contractor to carry out eligible work and the cost of acquisition of goods that enter into the execution of the work, without exceeding an annual limit of $750,000. When corporations are associated, the annual limit must be covered by a sharing agreement within the group of associated corporations. The tax credit will apply regarding an eligible expenditure incurred after March 20, 2012 for eligible work done before January 1, 2016 and for goods acquired after March 20, 2012 and before January 1, 2016. Moreover, to ensure that the regional tourist associations (RTA) in every tourist region of Quebec receive adequate financial support to play their role in tourist development and promotion, the government offers them a new option for the lodging tax. Thus, RTAs have the option to choose between a tax of $2 or $3 per overnight stay, or a tax of 3% of the price of each overnight stay. Measures pertaining to culture A new refundable tax credit for the production of multimedia environments or events staged outside Quebec is introduced. Quebec corporations may, under certain conditions, claim a refundable tax credit equal to 35% of labour expenditures incurred to carry out a production certified by the Société de développement des enterprises culturelles (SODEC) and consisting of either an event staged in an entertainment venue, or of a multimedia event carried out under a contract entered into with a person who does not have an establishment in Quebec. The labour expenditures giving rise to this tax credit may not exceed 50% of production expenses. The tax credit allowed regarding a production is limited to $350,000. The budget also changes certain parameters of the existing rules supporting businesses in the cultural sector. New positions are recognized for purposes of the tax relief granted to foreign workers holding a key decision-making position as part of an eligible foreign production. In addition, the enhancement applicable to certain French-language film or television productions for the purposes of the refundable tax credit for Quebec film and television production is broadened to apply to certain animated films of fiction. Finally, the cap of the refundable tax credit for the production of performances is increased regarding musical comedies. Capitalization of businesses Refundable tax credit pertaining to the costs of issuing shares as part of an initial public offering under the Stock Savings Plan II (SSP II) The SSP II is a plan that helps small corporations to raise capital. This plan already provides for tax assistance that enables individuals to deduct the adjusted cost of an eligible share in calculating their taxable income. The deduction may not exceed 10% of the individual’s total income. The tax assistance is broadened to corporations that incur share issue expenses in an initial public offering under the SSP II (subject to certain limits). The corporation will be entitled to a refundable tax credit on 30% of the eligible issue expenses for the year provided an advance ruling from the Minister of Revenue is issued in accordance with the rules applicable of the SSP II. This credit is applicable to expenses incurred after March 20, 2012 and will end on December 31, 2014. Fonds de solidarité FTQ and Fondaction Changes are made to an Act to establish the Fonds de solidarité des travailleurs du Québec (Fund) to increase the authorized percentage from 5% to 10% of the total amount of the Fund’s investments in certain corporations, including a financial institution registered with the Autorité des marchés financiers or the Office of the Superintendant of Financial Institutions. In addition, the investment requirement imposed on the Fund requiring that its eligible investments represent at least 60% of the average of its net assets is broadened to allow the Fund to increase its major investments in Quebec corporations. The tax credit for the acquisition of a share issued by Fondaction, which will end when Fondaction reaches a level of capitalization of at least $1.25 billion, is modified in two ways. First, the capitalization limit is raised over the next three years in order to allow Fondaction to collect additional capital of $150 million. Second, at the end of the three-year period, the rate of the tax credit will be brought down to 15%. Personal Tax Voluntary Retirement Savings Plans As expected, the budget announces the introduction of Voluntary Retirement Savings Plans (VRSP) which are, in fact, collective pension plans that all Quebec employers will be required to implement if they have at least five employees with at least one year of uninterrupted service, if they do not have a retirement savings plan through payroll deductions already in place. With the exception of the mandatory nature of VRSPs in Quebec, the rules proposed by the Quebec government are generally similar to the rules announced by the federal government on November 17, 2011 with respect to Pooled Registered Pension Plans (PRPPs). Employers will not be required to contribute to the VRSP put in place for their employees although, if they do decide to contribute, their contributions will not be subject to Quebec payroll taxes, as is the case of employer contributions to registered pension plans, and will be tax-deductible. Where an employer is required to offer a VRSP, employees with more than one year of uninterrupted service will be automatically enrolled unless they elect to opt out of the plan within 60 days of enrolment. The government is proposing to establish the following employee contributions rate, by default: · 2% from January 1, 2013 to December 31, 2015 · 3% from January 1, 2016 to December 31, 2016 · 4% as of January 1, 2017. A participant will be able to choose another contribution rate, change it or even cease contributions for a certain period of time. In addition, a participant will be able to continue contributing to the same VRSP after changing employers. As is the case with RRSPs, a participant will be able to withdraw his or her contributions before retirement although they will be taxable at that time. However, if an employer decides to make contributions to a VRSP set up for its employees, the employer contributions can only be withdrawn as of age 55. Participant contributions to a VRSP will be tax-deductible and will share the same annual maximum contribution amounts as RRSPs. Finally, persons who are not automatically enrolled, such as self-employed workers and individuals, will be able to enroll in a VRSP by contacting a plan administrator directly. Quebec intends on tabling the necessary legislative provisions in the spring of 2012 so that VRSPs are in place by the target date of January 2013. Businesses that are required to implement VRSPs will have two years to comply, i.e., by January 1, 2015. After the initial compliance period, employers required to offer a VRSP will have one year to comply. Tax assistance for seniors living independently The budget includes a series of measures to assist seniors who continue living in their homes. Refundable credit for home-support services for seniors: A number of enhancements are being made to this credit as of January 1, 2013 as follows: · The tax credit rate will gradually increase by one percent per year from 30% in 2012 to 35% in 2017 · The cap on expenses eligible for the tax credit will be increased from $21,600 to $25,500 for dependent seniors, and from $15,600 to $19,500 for other seniors, an increase of $3,900 · The income-based reduction to the credit for seniors recognized as being dependent is eliminated and, where the credit is determined in respect of a couple, the elimination of the reduction will apply as soon as one of the members of the couple is recognized as being dependent · Services related to the use of remote monitoring systems for seniors not living in a private seniors’ residence will be recognized as eligible home-support services for purposes of the credit · The tables that must be used by persons aged 70 years and older living in a residence for the elderly to determine the amount of eligible expenses included in their rent and eligible for the credit are amended and the maximum amounts regarding most types of expenses are being increased. Refundable credit for informal caregivers caring for an elderly spouse: The amount of the credit is increased to $700 in 2012 (from $607) and will be gradually increased thereafter by $75 each year to reach $1,000 as of 2016. The credit will then be indexed annually after that time. New refundable tax credit for costs incurred by seniors for a stay in a rehabilitation centre: This new refundable tax credit will be available as of the 2012 taxation year and will be equal to 20% of the total amounts paid by a Quebec resident aged 70 years or older at the end of the year for a stay in a public or private rehabilitation centre. There will be no limit to the quantum of expenses nor with respect to the taxpayer’s income. New refundable tax credit for the purchase or rental of equipment to help seniors continue living independently at home: This new refundable tax credit, which will be available as of 2012, will be equal to 20% of the amounts in excess of $500 paid for the purchase or rental of equipment to increase the sense of security of seniors 70 years of age or older or to maintain their independence, such as walk-in bathtubs, hospital beds, or remote monitoring devices such as “panic buttons”. There will be no limit regarding the quantum of expenses nor with respect to the taxpayer’s income. Tax credit for new graduates working in a remote resource region Since 2006, a non-refundable tax credit is granted to new graduates who decide to begin their career in a remote resource region. This tax credit reduces the tax payable by up to $3,000 per year, up to a cumulative amount of $8,000 when the new graduate resides on a continuous basis in a remote resource region and holds a job there related to his or her field of specialization. To encourage more new graduates who have completed post-secondary studies to begin their career in a remote resource region, the tax legislation will be amended to stipulate, in certain circumstances, an increase of the cumulative amount to $10,000. Cooperatives and Trusts Cooperatives Cooperative Investment Plan Members and workers of a cooperative acquiring qualifying securities issued by the cooperative can deduct, in calculating their taxable income, an amount representing 125% of the acquisition cost of the securities (without taking into account borrowing expenses and other expenses related to the acquisition). Many changes are brought to the Cooperative Investment Plan concerning the special tax relating to the redemption or repayment of qualifying securities within five years following the date of issuance of the securities (in case of the winding-up of the cooperative) and also concerning the nature of the payment of interest on preferred units (the interest must now be payable in cash rather than in preferred units of the cooperative). In addition, the measures applicable to shareholding workers cooperatives and work cooperatives eligible for the Cooperative Investment Plan are tightened. Renewal of the patronage dividend tax deferral mechanism The budget renews for an additional period of 10 years the mechanism that allows tax to be deferred on the amount of the patronage dividend attributed to a taxpayer that consists of a preferred unit of the cooperative until the units are disposed of. In addition, the budget tightens the rules regarding the issuance of a qualification certificate that is mandatory to benefit from the mechanism. Trusts Change to the tax payable by an inter vivos trust The tax rate applicable to inter vivos trusts (including a mutual fund trust and a specified investment flow-through trust) is increased from 20% to 24% to correspond to the highest tax rate applicable to an individual. This change applies for taxation years of an inter vivos trust ending after March 19, 2012. Changes to the taxation of trusts that are not residents of Canada A specified trust (i.e., an inter vivos trust non-resident in Canada and not tax-exempt) will be required to pay an annual tax at the rate of 5.3% on its property income derived from the rental of immovable properties located in Quebec. This tax applies for taxation years ending after March 19, 2012. As of March 20, 2012, an inter vivos trust that begins to reside in Canada will be deemed to dispose (and reacquire) its immovable properties located in Quebec at their fair market value immediately before its immigration. As a result, the trust will be liable for Quebec tax on the taxable capital gain and the recaptured depreciation that may arise. The trust will have to obtain a compliance certificate before the disposition and pay the tax or provide sufficient security to guarantee payment of such tax.

Tuesday, March 13, 2012

My MeetMe.SO link

My MeetMe.SO link: My MeetMe.SO link. Please use it to schedule time with me.