April 21, 2015 Federal Budget STEP Canada Summary 1. PERSONAL INCOME TAX PROPOSALS Tax-Free Savings Account Increased Contribution Limit Budget 2015 proposes to increase the annual contribution limit for Tax-Free Savings Accounts to $10,000, effective for 2015 and subsequent taxation years. The annual contribution limit will not be indexed to inflation. This change will apply as of January 1, 2015. Home Accessibility Tax Credit Budget 2015 proposes to introduce the Home Accessibility Tax Credit, a new 15% nonrefundable tax credit available to certain seniors and persons with disabilities (and certain of their relatives). This credit would apply to up to $10,000 (per calendar year) of eligible home renovation expenditures made to improve safety and accessibility in eligible dwellings. The credit will apply in respect of expenditures made on or after January 1, 2016. Reduced Minimum Withdrawal Factors for Registered Retirement Income Funds Upon reaching the age of 71, a holder of a Registered Retirement Savings Plan ( RRSP ) must convert the RRSP to a Registered Retirement Income Fund ( RRIF ). A minimum amount must then be withdrawn from the RRIF in subsequent years. Budget 2015 proposes to reduce the minimum amount that such holders must withdraw from a RRIF. This reduction will apply until the holder has reached the age of 95 at the beginning of a year. Similar changes are proposed for the minimum withdrawal amounts for defined contribution registered pension plans and pooled registered pension plans. These changes will apply for 2015 and subsequent taxation years. Increased Lifetime Capital Gains Exemption for Qualified Farm or Fishing Property A lifetime capital gain exemption of $800,000, indexed to inflation ($813,600 in 2015), is currently available for dispositions of qualified farm or fishing property. Budget 2015 proposes to increase this exemption to the greater of the indexed amount and $1 million. Page 1
This increase will apply to dispositions occurring on or after April 21, 2015. Registered Disability Savings Plan Legal Representation Budget 2012 introduced measures to permit qualifying family members of an individual to become the holder of a registered disability savings plan where the individual may be unable to enter into a contract due to a lack of capacity. Budget 2015 proposes to extend these measures, which were set to expire at the end of 2016, to the end of 2018. Transfer of Education Credits Effect on the Family Tax Cut Budget 2015 proposes to revise the calculation of the Family Tax Cut Credit to include the transfer of certain education-related amounts (e.g., tuition, education and textbook tax credits). This is intended to ensure that couples claiming the family tax cut credit receive the appropriate value of the credit. This change will apply for 2014 and subsequent taxation years 2. CHARITIES PROPOSALS Donations Involving Private Corporation Shares or Real Estate Budget 2015 proposes to exempt from capital gains tax dispositions of shares of private corporations and real estate where (i) the cash proceeds are donated to a qualified donee within 30 days of the disposition and (ii) the property is sold to a purchaser that deals at arm s length with both the vendor and the qualified donee. Where only a portion of the proceeds are donated, only a portion of the capital gain that would otherwise arise will be exempted. New anti-avoidance rules will deny the exemption where, within the five years following the disposition, (i) the donor (or a person not dealing at arm s length with the donor) directly or indirectly reacquires the property (or substituted property) or (ii) the shares are redeemed at a time when the donor and the redeeming corporation do not deal at arm s length with each other. This change will apply to dispositions occurring after 2016. Investments by Registered Charities in Limited Partnerships Canadian registered charities are subject to negative tax consequences if they carry on a business (other than certain related businesses ). As a result, there has been a concern that charities that invest in a partnership could be viewed as carrying on the business of the partnership. Page 2
Budget 2015 proposes to permit registered charities (and registered Canadian amateur athletic associations) to become limited partners of a partnership without being considered to carry on the partnership s business. Such charities (and associations), together with non-arm s length entities, would be permitted to hold up to a 20% interest in a limited partnership, provided the charity (or association) deals at arm s length with each general partner of the partnership. This change will apply to investments made on or after April 21, 2015. Gifts to Foreign Charitable Foundations Donations to Canadian registered charities, which are qualified donees for purposes of the Income Tax Act, are eligible for certain tax credits or deductions. Canadian registered charities are also permitted to make gifts to other qualified donees. Budget 2015 proposes to permit foreign charitable foundations to register as qualified donees if they (i) receive a gift from the Canadian government and (ii) are engaged in disaster relief or urgent humanitarian aid or carry on other activities of national interest to Canada. This change will apply upon the enacting legislation receiving Royal Assent. 3. BUSINESS INCOME TAX PROPOSALS Reduced Small Business Tax Rate Budget 2015 proposes to reduce the federal small business income tax rate applicable to the first $500,000 of qualifying active business income of a Canadian-controlled private corporation ( CCPC ). The reduction will be phased in as follows: 2016 2017 2018 2019 Small business rate 10.5% 10.0% 9.5% 9.0% For CCPCs with off-calendar taxation years, the applicable rate will be pro-rated. As a result of the proposed reduction to the federal small business income tax rate, Budget 2015 proposes to adjust the gross-up factor and dividend tax credit applicable to non-eligible dividends (i.e., dividends paid out of income taxed at reduced rates, generally at the small business rate). The adjustment will be phased in as follows: 2016 2017 2018 2019 Gross-up factor 17.0% 17.0% 16.0% 15.0% Dividend tax credit 10.5% 10.0% 9.5% 9.0% Page 3
Manufacturing and Processing Machinery and Equipment Accelerated Capital Cost Allowance Budget 2015 proposes to introduce a new (but temporary) capital cost allowance account for machinery and equipment acquired after 2015 and before 2026 primarily for use in Canada for manufacturing and processing goods for sale or lease. New Class 53 will provide an accelerated CCA rate of 50% per year on a declining balance basis. Class 53 property will be qualified property for purposes of the Atlantic Investment Tax Credit. Agricultural Cooperatives Deferral of Tax on Patronage Dividends Paid in Shares Budget 2015 proposes to extend the tax deferral applicable to patronage dividends paid in the form of eligible shares by an eligible agricultural cooperative to its members. This extension will apply to eligible shares issued before 2021. Synthetic Equity Arrangements The dividend rental arrangement rules disallow the intercorporate dividend deduction to a corporate shareholder that has entered into an arrangement where the main reason of the arrangement is to enable the corporation to receive a dividend on a share but the economic exposure in respect of the share is borne by another person (a counterparty). Certain taxpayers (typically financial institutions) enter into arrangements (so-called synthetic equity arrangements) whereby the taxpayer retains the legal ownership of a share but effectively employs an equity derivate to transfer the economic exposure in respect of the share to a counterparty (generally, a tax-exempt entity or a non-resident). Arguably, the dividend rental arrangement rules do not apply to this type of arrangement, thereby permitting the taxpayer to claim the intercorporate deduction in respect of the dividends while also deducting dividendequivalent payments paid to the counterparty. Budget 2015 proposes to broaden the dividend rental arrangement rules to generally apply where a taxpayer (or a person not dealing at arm s length with the taxpayer) enters into a synthetic equity arrangement in respect of a share, thereby denying the taxpayer s intercorporate dividend deduction for dividends received on the shares. A synthetic equity arrangement will not include certain agreements or arrangements, such as certain publicly traded derivative agreements. An exception to these new rules will apply where the taxpayer can establish that the counterparty that bears the economic exposure in respect of the share as a result of the synthetic equity arrangement or other equity derivative entered into in connection with the arrangement is not a tax indifferent investor (defined to include, among others, tax-exempt entities and certain nonresidents). A taxpayer will be presumed to qualify for this exception where it obtains specific representations from the counterparty that it is not a tax indifferent investor. Page 4
A new anti-avoidance rule will deem certain arrangements that do not satisfy the definition of a synthetic equity arrangement to be dividend rental arrangements. These changes will apply to dividends paid or payable after October 2015. Stakeholders are invited to submit comments on whether the scope of the proposed synthetic equity arrangement rules should be broadened to apply irrespective of the counterparty s tax status by August 31, 2015. Tax Avoidance of Corporate Capital Gains (Section 55) Subsection 55(2) of the Income Tax Act is an anti-avoidance provision intended to prevent corporate shareholders from converting would-be capital gains on a disposition of a share into a deductible intercorporate dividend. Subsection 55(2) applies where (i) one of the purposes of the dividend (or the effect of the dividend where the dividend arises due to subsection 84(3)) reduces the capital gain that would otherwise arise on a disposition of the share and (ii) the dividend (or a portion thereof) exceeds the dividend payor s safe income on hand (effectively, tax-paid retained earnings). Subsection 55(2), as currently drafted, does not apply where the dividend has the effect of decreasing the fair market value of the share below its adjusted cost base or increasing the adjusted cost base of the share, provided that the dividend does not reduce the capital gain that would otherwise arise on a disposition of such share (e.g., immediately before the dividend, the adjusted cost base of the share equals or exceeds its fair market value). Where the dividend has this effect, the taxpayer could effectively utilize the inherent capital loss on the share to shield another capital gain, such as by transferring to the dividend payor on a tax-deferred basis other property with an inherent capital gain and then disposing of the shares of the dividend payor). Budget 2015 proposes to expand subsection 55(2) to apply where one of the purposes of the dividend is either to (i) significantly reduce the fair market value of any share or (ii) significantly increase the total cost of properties of the shareholder. Further, all recharacterized dividends will be deemed to be capital gains, not proceeds of disposition. Related amendments are intended to ensure that these changes will also apply to, among other things, stock dividends and dividends paid on shares the value of which is (or becomes) nominal. Budget 2015 also proposes to amend paragraph 55(3)(a) (an exception to subsection 55(2) in the case of certain intra-group dividends that generally applies where an unrelated party does not acquire certain significant interests in the same series of transactions) to apply only to a dividend arising from a redemption of shares. Certain consequential changes will also be made as a result of the changes to subsection 55(2). These changes will apply to dividends received on or after April 21, 2015. Page 5
4. INTERNATIONAL TAX PROPOSALS Withholding for Non-Resident Employers Many of Canada s tax treaties exempt non-resident employees from Canadian tax where their earnings in Canada are nominal or they are present in Canada for only a short period of time. Non-resident employers generally are required to withhold and remit Canadian tax on Canadiansource income earned by their employees, notwithstanding that such employees may not be subject to Canadian tax. This requirement creates an unnecessary administrative burden. Budget 2015 proposes to introduce an exemption to these withholding and remittance requirements. To qualify, both the non-resident employer and employee must satisfy certain conditions. The employer (i) must be resident in a country with which Canada has a tax treaty, (ii) must not carry on business in Canada through a permanent establishment and (iii) must be certified by the Minister at the time of the payment. The employee (i) must be exempt from Canadian tax on the payment because of a treaty between Canada and the employee s country of residence and (ii) must not be present in Canada for 90 days or more in any 12-month period that includes the time of the payment. These changes will apply to payments made after 2015. Captive Insurance and FAPI Budget 2014 introduced specific anti-avoidance rules that include income from certain insurance swaps in a controlled foreign affiliate s foreign accrual property income ( FAPI ). These rules sought to address the use of captive insurance companies to shift income from the insurance of Canadian risks offshore. Budget 2015 proposes to extend these rules to include income in respect of ceding a portfolio of Canadian risks in FAPI. This change will apply to taxation years beginning on or after April 21, 2015. Stakeholders are invited to submit comments on this change by June 30, 2015. 5. ADMINISTRATIVE PROPOSALS Repeated Failure to Report Income Penalty Budget 2015 proposes to ease the penalty applicable to repeated failures to report income so that it applies only where the taxpayer fails to report income of at least $500 in the year and in any of the three preceding taxation years. The amount of the penalty will also be amended to be the lesser of (i) 10% of the unreported income and (ii) 50% of the understated tax (or overstated tax credits) related to the failure to report the income (net of any source deductions in respect of the unreported income). These changes will apply to taxation years beginning after 2014. Page 6
Alternative Arguments in Support of Assessments The Courts generally have held that the amount of tax assessed by the Minister to a taxpayer cannot be increased on appeal; however, the components comprising the amount of such tax (i.e., the individual items of income and expenses) can be adjusted. Budget 2015 proposes to introduce changes to the Income Tax Act, the Excise Tax Act and the Excise Act, 2001 to permit the Minister and the Courts to increase or otherwise adjust an amount included in an assessment under objection or appeal so long as the total assessed amount does not increase. This change will apply upon the enacting legislation receiving Royal Assent. Information Sharing for the Collection of Non-Tax Debts Budget 2015 proposes to allow the CRA to share within the CRA taxpayer information for purposes of collecting non-tax debts owing under certain federal and provincial government programs. Amendments to the Excise Tax Act and the Excise Act, 2001 will also allow the CRA to share taxpayer information for certain programs where such sharing is permitted under the Income Tax Act. This change will apply upon the enacting legislation receiving Royal Assent. Quarterly Remitter Category for New Employers Budget 2015 proposes to permit certain new employers to remit employee source deductions on a quarterly basis (instead of on a monthly basis). To be eligible for this relief, new employers must have withholdings of less than $1,000 in respect of each month. This change will apply to withholding obligations arising after 2015. Streamlining Reporting Requirements for Foreign Assets Canadian resident taxpayers that own specified foreign property are currently required to complete and file a Foreign Income Verification Statement (Form T1135) where the total cost of such property exceeds $100,000. In recent years, revisions to this form have created compliance issues by requiring increased details concerning specified foreign property. Budget 2015 proposes to simplify these reporting requirements where the taxpayer holds specified foreign property with an aggregate cost amount of less than $250,000 throughout the year. This change will apply to taxation years beginning after 2014. Page 7