12 September 2017 Global Tax Alert News from Americas Tax Center Canada releases draft income tax proposals for public comment EY Global Tax Alert Library The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: http://www.ey.com/us/en/services/ Tax/Americas-Tax-Center---borderlessclient-service Executive summary On 8 September 2017, Canada s Department of Finance released for public comment a package of draft income tax legislative proposals and explanatory notes relating to a number of measures announced in the 2017 federal budget, 1 as well as certain previously announced measures. These proposals take into account comments received since the announcement of the measures; in particular, technical changes were made to the proposed measures dealing with the anti-avoidance rules for registered plans, mutual fund corporation reorganizations, the mark-to-market election for derivatives, straddle transactions, billed-basis accounting, and stub period foreign accrual property income (FAPI). Interested parties are invited to provide comments on the proposals by 10 October 2017. On the same date, the Department of Finance also released for comment a separate package of draft Goods and Services Tax/Harmonized Sales Tax (GST/HST) and excise duty legislative proposals and explanatory notes (look for a separate EY Global Tax Alert to come for more information). The following is a summary of the measures included in the 8 September 2017 income tax legislative proposals.
2 Global Tax Alert Americas Tax Center Detailed discussion Federal budget 2017 measures The package includes a number of international and business income tax measures that were announced in the 2017 federal budget but not included in the first budget implementation bill enacted in June (Bill C-44). Business income and international tax measures Clean energy generation equipment and related expenses Changes to the CCA rules for clean energy generation equipment in Classes 43.1 and 43.2 and related rules for Canadian renewable and conservation expenses, with respect to geothermal energy, including: Expansion of eligible equipment to include geothermal equipment that is used primarily for the purpose of generating heat or a combination of heat and electricity Amendments to make geothermal heating an eligible thermal energy source for use in a district energy system Amendments to allow expenses incurred for the purpose of determining the extent and quality of a geothermal resource and the cost of all geothermal drilling, for both electricity and heating projects, to qualify as a Canadian renewable and conservation expense (Applicable in respect of property acquired for use on or after 22 March 2017 that has not been used or acquired for use before that date, and in respect of expenses incurred on or after 22 March 2017) Mutual fund corporation reorganizations Extension of the mutual fund merger rules to facilitate the reorganization of certain mutual fund corporations (i.e., those that have multiple classes of shares, each representing a separate investment fund) into multiple mutual fund trusts on a tax-deferred basis. (Generally applicable to qualifying reorganizations that occur on or after 22 March 2017) Segregated fund mergers Amendments to allow the tax-deferred merger of segregated funds, consistent with the treatment of mutual fund trust mergers. Amendments are also proposed to allow segregated funds to carry over non-capital losses, subject to the normal restrictions and limitations on non-capital loss carryovers. (Applicable to mergers of segregated funds carried out after 2017 and to losses arising in taxation years beginning after 2017) Mark-to-market election for derivatives Introduction of an election to allow taxpayers to apply the mark-to-market method for computing gains or losses from certain eligible derivatives held on income account. (Applicable to taxation years that begin on or after 22 March 2017) Straddle transactions Introduction of an anti-avoidance rule that targets straddle transactions. In its simplest form, a straddle is a transaction in which a taxpayer concurrently enters into two or more offsetting positions (often derivative positions), and subsequently disposes of the positions to realize a loss in one year while deferring recognition of the offsetting gain until a future taxation year. A stop-loss rule is introduced to effectively defer the realization of any loss on the disposition of a position to the extent of any unrealized gain on an offsetting position, subject to certain exceptions. (Applicable to any loss realized on a position (or offsetting position) acquired, entered into, renewed or extended, or that becomes owing on or after 22 March 2017) Foreign branches of Canadian life insurers Amendments to ensure that Canadian life insurers are taxable in Canada with respect to income earned from specified Canadian risks through a designated foreign insurance business. Similar to the rules under the FAPI regime, this rule will apply where 10% or more of the gross premium income (net of reinsurance ceded) earned by a foreign branch of a Canadian life insurer is premium income in respect of specified Canadian risks (i.e., in this case, insuring Canadian persons). Related anti-avoidance rules are proposed that apply to insurance swap arrangements and transactions (or series of transactions), one of the purposes of which was to avoid the proposed rules. A similar anti-avoidance rule (for avoidance transactions or series of transactions) is also added in respect of the FAPI regime. (Applicable to taxation years that begin on or after 22 March 2017) Canadian exploration expenses Amendments to generally classify expenditures related to drilling or completing discovery wells, along with expenditures related to building temporary access roads to these wells or preparing sites in respect of them, as Canadian development expense (CDE) instead of Canadian exploration expense (CEE). (Applicable to expenses incurred after 2018, subject to transitional rules)
Global Tax Alert Americas Tax Center 3 Flow-through share rules Elimination of the rule that allowed eligible small oil and gas corporations to treat the first CA$1 million of CDE as CEE (for purposes of the flowthrough share rules). (Applicable to expenses incurred after 2018, subject to transitional rules) Billed-basis accounting Phase-out of the deduction available to professional firms for unbilled work in progress (WIP) over a five-year period, instead of the two-year period announced in the 2017 federal budget. For the first taxation year that commences on or after 22 March 2017 (in most cases, the 2018 calendar year), the deduction for WIP will be limited to 80% of the lesser of the cost and fair market value of unbilled WIP. In each of the four subsequent years, the amount of the deduction will be reduced by an additional one-fifth of the lesser of the cost and fair market value of the unbilled WIP. After the five-year phase-out period, no deduction will be available for unbilled WIP. Meaning of factual control Introduction of a new provision clarifying that all factors that are relevant in the circumstances may be considered in determining whether factual control exists. This amendment is intended to remove restrictions on the scope of the factual control test established by the Federal Court of Appeal in McGillivray Restaurant Ltd. v The Queen (2016 FCA 99). (Effective for taxation years that begin on or after 22 March 2017) Ecological gifts Various technical amendments, including amendments that will prevent private foundations from receiving ecological gifts and will allow donations of personal servitudes to qualify as ecological gifts, provided certain conditions are met (e.g., the servitude must run for at least 100 years). (Applicable in respect of gifts made on or after 22 March 2017) Personal income tax measures Anti-avoidance rules for registered plans Extension of the anti-avoidance rules that currently apply to tax-free savings accounts (TFSAs), registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) to registered education savings plans (RESPs) and registered disability savings plans (RDSPs). This includes the advantage tax rules, the prohibited investment rules and the non-qualified investment rules. (Subject to exceptions, this measure will apply to transactions occurring, and investments acquired, after 22 March 2017) Nurse practitioners Extension of the certifications nurse practitioners can provide for various purposes under the Income Tax Act (Canada) including for purposes of the child care expenses deduction, the education tax credit, the RDSP rules, and the registered pension plan benefit rules. For example, in addition to being allowed to certify eligibility for the 15% non-refundable disability tax credit (a measure announced in the 2017 federal budget and enacted by Bill C-44), nurse practitioners will be authorized, for purposes of the child care expenses deduction, to certify that the lower-income supporting individual is incapable of caring for children because of that individual s mental or physical infirmity. (Applicable to certifications made on or after 8 September 2017) Nurse practitioners will also be added to the list of medical practitioners who can prescribe a therapy plan and under whose general supervision such a plan can be administered for the purposes of the medical expense tax credit. (Applicable to medical expenses incurred on or after 8 September 2017) Other previously announced measures The package also includes the following proposals previously announced by the Department of Finance: Armed Forces Deduction (from the 18 May 2017 notice of ways and means motion) Exemption of the military salaries of all Canadian Armed Forces personnel and police officers deployed on named international operational missions from federal income taxes, up to and including the pay level of Lieutenant-Colonel (General Service Officers) of the Canadian Forces. (Applicable to the 2017 and subsequent taxation years) Stub period FAPI (from the 16 September 2016 draft legislative proposals) Introduction of revised rules to ensure that stub period FAPI is included in the taxpayer s income where the taxpayer is subject to an acquisition of control or its interest in a foreign affiliate is reduced in certain circumstances. A different version of these rules was previously included in the 12 July 2013 package of draft legislative proposals, and subsequently revised in the 16 September 2016 package of draft legislative proposals. The latest revisions contained in the 8 September 2017 draft legislation take into consideration
4 Global Tax Alert Americas Tax Center the 15 November 2016 recommendations of the Joint Committee on Taxation of The Canadian Bar Association and Chartered Professional Accountants of Canada, and will apply as of 12 July 2013, subject to certain transitional rules (which may permit the use of the 16 September 2016 version of the rules under certain conditions). It should be noted that the 16 September 2016 draft legislative proposals included numerous other technical amendments and new rules affecting other topics, which are not included in the 8 September 2017 draft legislation. It is expected that these other measures will be part of a notice of ways and mean motion to be released at a later date. Endnote 1. See EY Global Tax Alerts, Canada issues Federal budget 2017-18, dated 24 March 2017 and Canada s Federal budget 2017 18 and its implications for private companies and shareholders, dated 28 March 2017.
Global Tax Alert Americas Tax Center 5 For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Toronto Linda Tang +1 416 943 3421 linda.y.tang@ca.ey.com Mark Kaplan +1 416 943 3507 mark.kaplan@ca.ey.com Phil Halvorson +1 416 943 3478 phil.d.halvorson@ca.ey.com Trevor O Brien +1 416 943 5435 trevor.obrien@ca.ey.com Ernst & Young LLP (Canada), Montreal Albert Anelli +1 514 874 4403 albert.anelli@ca.ey.com Angelo Nikolakakis +1 514 879 2862 angelo.nikolakakis@ca.ey.com Nicolas Legault +1 514 874 4404 nicolas.legault@ca.ey.com Nik Diksic +1 514 879 6537 nik.diksic@ca.ey.com Ernst & Young LLP (Canada), Calgary Karen Nixon +1 403 206 5326 karen.r.nixon@ca.ey.com Mark Coleman +1 403 206 5147 mark.coleman@ca.ey.com Ernst & Young LLP (Canada), Vancouver Eric Bretsen +1 604 899 3578 eric.r.bretsen@ca.ey.com Ernst & Young LLP, Canadian Tax Desk, New York Terry McDowell +1 212 773 6332 terry.mcdowell@ey.com Andrea Lepitzki +1 212 773 5415 andrea.lepitzki@ey.com
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