2015 Federal and Provincial Budgets
PwC Canada assists you with your tax planning needs, by sharing our analysis on issues relating to Canada's budget announcements as they happen.
On April 21, 2015, the Federal Minister of Finance, Joe Oliver, presented the majority government’s budget. This Tax Insights discusses the tax initiatives proposed in the budget.
Small Business Tax Rate
The small business tax rate will be reduced from 11% to 9% as follows:
The reduction in the small business rate will be pro-rated for corporations with taxation years that straddle these dates.
Manufacturing and Processing Machinery and Equipment: Accelerated Capital Cost Allowance (CCA)
New Class 53 will provide CCA of 50% on a declining-balance basis for machinery and equipment acquired after 2015 and before 2026 primarily for use in Canada for the manufacturing and processing of goods for sale or lease. Assets that would currently be included in Class 29 will be eligible.
The "half year rule," which allows half the CCA deduction otherwise available in the taxation year in which an asset is first available for use, will apply.
Eligible assets acquired after 2025 will qualify for the 30% declining-balance rate under Class 43.
Tax Avoidance of Corporate Capital Gains – Section 55
Stemming from a recent decision by the Tax Court of Canada that involved the creation of an unrealized capital loss that was used to avoid capital gains tax on the sale of another property, the budget proposes to amend section 55 to ensure that it applies where one of the purposes for a dividend is to effect a significant reduction in the fair market value of any share or significant increase in the total cost of properties of the dividend recipient. Other related rules are also proposed to ensure this amendment is not circumvented.
The budget also proposes to make a number of additional changes to the wording and structure of section 55, including changes:
The above measures apply to dividends received after April 20, 2015.
Synthetic Equity Arrangements
For dividends that are paid or become payable after October 2015, the dividend rental arrangement rules are modified to deny the inter-corporate dividend deduction on dividends received by a taxpayer on a Canadian share in respect of which there is a synthetic equity arrangement.
A synthetic equity arrangement, in respect of a share owned by a taxpayer, will be considered to exist when the taxpayer (or a person that does not deal at arm's length with the taxpayer) enters into one or more agreements that have the effect of providing to a counterparty all or substantially all of the risk of loss and opportunity for gain or profit in respect of the share.
When a person that does not deal at arm's length with the taxpayer enters into such an agreement, a synthetic equity arrangement will be considered to exist if it is reasonable to conclude that the non-arm's length person knew, or ought to have known, that the effect described above would result.
An exception to the revised rule will apply, in general terms, when the taxpayer can establish that no "tax-indifferent investor" (including, tax-exempt Canadian entities and certain trusts, partnerships and non-resident entities) is a counterparty. Certain other exceptions are provided.
The budget invites comments by August 31, 2015, concerning whether this measure should deny the inter-corporate dividend deduction on dividends received by a taxpayer on a Canadian share in respect of which there is a synthetic equity arrangement, regardless of the tax status of the counterparty. The budget comments that, although this approach would have a broader scope it would eliminate some of the complexities.
Small Business Deduction: Consultation on Active versus Investment Business
The budget announces a review of the circumstances in which income from a business, the principal purpose of which is to earn income from property, should qualify as active business income.
Interested parties are invited to submit comments by August 31, 2015.
Consultation on Eligible Capital Property
The 2014 budget announced a public consultation on the proposal to repeal the eligible capital property regime and replace it with a new capital cost allowance class.
The government intends to release detailed draft legislative proposals for stakeholder comment before their inclusion in a bill.
Lowering the EI Premium Rate in 2017
In 2017, the government will implement the seven-year break-even EI premium rate-setting mechanism, which will ensure that EI premiums are no higher than needed to pay for the EI program over time.
This is expected to reduce the EI premium rate from $1.88 in 2016 to an estimated $1.49 in 2017.
Quarterly Remitter Category for New Employers
New employers with withholdings of less than $1,000 in respect of each month will be allowed to remit source deductions on a quarterly, rather than a monthly, basis. Employers will remain eligible for quarterly remitting, as provided under this measure, as long as their required monthly withholding amount remains under $1,000.
This measure will apply in respect of withholding obligations arising after 2015.
Agricultural Cooperatives: Deferral of Tax on Patronage Dividends Paid in Shares
The tax deferral that applies to patronage dividends paid to members by an eligible agricultural cooperative in the form of eligible shares is extended for five years, so that it will apply in respect of eligible shares issued before 2021.
Tax Planning by Multinational Enterprises
Canada has an extensive network of bilateral tax treaties with other countries that support cross-border trade and investment. Some of these treaties are more favourable than others and provide certain possible advantages to foreign-based investors when structuring investments in Canadian assets or businesses.
In the March 21, 2013 federal budget, the Canadian government announced that in response to "treaty shopping" concerns, it would consult on possible measures that would "protect the integrity of Canada's tax treaties while preserving a business tax environment that is conducive to foreign investment."
The Canadian government initiatives are also part of a larger global dialogue which has resulted in the Organisation for Economic Co-operation and Development (OECD) and the G-20 (collectively referred to as "OECD") adopting a 15 point action plan (released July 19, 2013) on base erosion and profit shifting (BEPS).
The OECD identified treaty abuse, and in particular treaty shopping, as one of the most important sources of BEPS concerns.
The February 11, 2014 federal budget outlined a possible domestic rule (to be included in the Income Tax Conventions Interpretation Act) aimed at preventing treaty shopping.
Certain elements of the rule as outlined in the 2014 budget resembled elements of limitation on benefits rules with which Canadian tax advisers were familiar; however, other elements were quite different in approach. The 2014 budget also invited input from stakeholders on issues related to international tax planning to inform Canada's participation in the OECD discussions.
On March 14, 2014, the OECD released its Public Discussion Draft "BEPS Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances." Generally, the OECD Discussion Draft recommended that treaty abuse be countered primarily through changes to tax treaties to adopt a US-style limitation on benefits (LOB) rule, supplemented by a more general anti-abuse rule under which treaty benefits would not be available if "one of the main purposes" of a transaction was to secure those benefits and obtaining the benefits was contrary to the "object and spirit" of the relevant provisions of the tax treaty. The OECD received numerous submissions on its recommendations and public hearings took place in the spring of 2014.
On September 16, 2014, the OECD released another report, "Preventing the Granting of Treaty Benefits in Inappropriate Circumstances: Action 6: 2014 Deliverable." While this report does not contain the final OECD recommendations (which are not expected until September 2015), the OECD recommendations in the 2014 Deliverable indicate that participating countries may have somewhat more flexibility than the earlier report recommended in meeting the "minimum standards" to counter abusive treaty shopping.
Other OECD recommendations still awaiting finalization include a recommendation on a form of multi-lateral instrument which might be entered into by participating countries as a means of overcoming some of the challenges of negotiating changes to tax treaties on a purely bilateral basis.
The budget states that the government will proceed in a manner that balances tax integrity and fairness with the competitiveness of Canada's tax system. Improving business tax fairness and competitiveness will foster an environment in which businesses can thrive and compete in a global economy.
The government states in the budget its commitment to maintaining Canada's advantage as an attractive destination for business investment.
Withholding for Non-Resident Employers
The budget provides relief for certain non-resident employers with non-resident employees working in Canada from payroll withholding requirements, effective January 1, 2016.
See our Tax Insights "2015 Federal budget: Good news for foreign employers with frequent business travellers to Canada," which will be available shortly at www.pwc.com/ca/taxinsights
An anti-avoidance rule in the foreign accrual property income (FAPI) regime is intended to prevent Canadian taxpayers from shifting income from the insurance of Canadian risks (i.e. risks in respect of persons resident in Canada, property situated in Canada or businesses carried on in Canada) offshore. The 2014 budget had amended this rule to curtail certain tax-planning arrangements (sometimes referred to as "insurance swaps").
The 2015 budget further amends this rule to curtail alternative arrangements that are intended to achieve tax benefits similar to those that the 2014 amendment was intended to prevent. For taxation years that begin after April 20, 2015:
Comments on this proposed measure must be submitted by June 30, 2015.
Streamlining T1135 Filings
The budget proposes to simplify foreign property reporting for taxation years that begin after 2014. Under a revised form being developed by the Canada Revenue Agency (CRA), if the total cost of the taxpayer's foreign property is less than $250,000 throughout the year, the taxpayer can report the property under a new simplified foreign asset reporting system.
Automatic Exchange of Information
In November 2014, the G-20 countries endorsed a new common reporting standard for automatic information exchange developed by the Organisation for Economic Development and Co-operation.
Under the new standard, foreign tax authorities will provide information to the CRA relating to financial accounts in their jurisdictions held by Canadian residents. The CRA will, on a reciprocal basis, provide corresponding information to the foreign tax authorities on accounts in Canada held by residents of their jurisdictions.
Canada proposes to implement the common reporting standard starting July 1, 2017, allowing a first exchange of information in 2018. As of July 1, 2017, financial institutions must have procedures to identify accounts held by residents of any country other than Canada and to report the required information to the CRA.
As the CRA formalizes exchange arrangements with other jurisdictions, having been satisfied that each jurisdiction has appropriate capacity and safeguards in place, the information will be exchanged on a reciprocal, bilateral basis.
Draft legislative proposals will be released for comments in the coming months.
Donations Involving Shares of Private Corporations or Real Estate
Commencing after 2016, the budget provides an exemption from capital gains tax in respect of certain dispositions of private corporation shares or real estate. The exemption will be available when:
The exempt portion of the gain will be based on the proportion that the cash proceeds donated is of the total proceeds from the disposition.
Anti-avoidance rules will apply to reverse the exemption when, within five years from the date of disposition, the donor or a person that does not deal at arm's length with the donor:
Investments in Limited Partnerships
The budget will allow registered charities and registered amateur athletic associations to acquire and hold a passive interest in a limited partnership without being considered to be carrying on the business of the partnership. For the investment to be considered passive, the charity or association must deal at arm's length with each general partner of the partnership and must, together with all non-arm's length entities, hold 20% or less of the interests in the partnership.
This measure will not apply when a charitable organization or public foundation carries on a related business through a limited partnership.
The excess corporate holding rules will be amended to "look through" limited partnerships and amendments will be made to the non-qualifying security rules and loanback rules so they will apply to donations of interests in limited partnerships.
These measures will apply in respect of limited partnership investments made or acquired after April 20, 2015.
Gifts to Foreign Charitable Foundations
The budget allows the Minister of National Revenue, in consultation with the Minister of Finance, to grant qualified donee status to a foreign charitable foundation for a 24 month period if the foreign charity receives a gift from the government and the charity is pursuing activities related to disaster relief or urgent humanitarian aid or is carrying on activities in the national interest of Canada.
This measure will apply on royal assent to the enacting legislation.
Tax-Free Savings Account (TFSA)
Starting in 2015, the annual TFSA contribution limit will increase from $5,500 to $10,000 and will remain at this level for subsequent years. The limit will no longer be indexed to inflation.
For more information on TFSAs, see our Tax Insights "Tax-free savings accounts (TFSAs): Making the most of them at www.pwc.com/ca/taxinsights.
Dividend Tax Rates – Non-Eligible
As a result of the small business tax rate reductions (see above), the budget increases non-eligible dividend tax rates starting in 2016, so that the rates will be as follows:
|Dividend gross-up||Dividend tax credit (on grossed-up dividends)||Top federal rate|
Lifetime Capital Gains Exemption for Qualified Farm or Fishing Property
For dispositions of qualified farm or fishing property that occur after April 20, 2015, the Lifetime Capital Gains Exemption will increase from $813,600 to $1,000,000.
Minimum Withdrawals for Registered Retirement Income Funds (RRIF)
Commencing 2015, the minimum annual withdrawal amount for RRIF holders will be reduced to more accurately reflect long-term rates of return and expected inflation.
Home Accessibility Tax Credit
Effective 2016, eligible individuals who spend up to $10,000 on eligible expenditures in respect of qualifying individuals (seniors and certain persons with disabilities) can claim a non-refundable tax credit of up to $1,500.
Eligible expenditures in connection with an eligible dwelling for the qualifying individual include certain renovations or alterations that increase mobility or safety. This credit can be claimed in addition to the Medical Expense Tax Credit, to the extent that both apply.
Tax Measures for Families
The budget provides a reminder that it will implement the new Family Tax Cut, increase the child care expense deduction maximum dollar limits and repeal the Child Tax Credit.
For more information, see our Tax Insights "Income-splitting and other tax measures for families introduced" at www.pwc.com/ca/taxinsights.
Transfer of Education Credits – Effect on the Family Tax Cut
The Family Tax Cut rules may in some instances reduce the value of the Family Tax Cut for couples who transfer education-related amounts between themselves. Retroactive to 2014, the calculation of the Family Tax Cut will be revised to ensure that this reduction does not occur.
Affected taxpayers will be automatically reassessed for the 2014 taxation year, after the enacting legislation receives royal assent.
Repeated Failure to Report Income Penalty
Effective 2015, the calculation of the repeated failure to report income penalty will be amended with a view to preventing situations where the penalty would be disproportionate to the related tax liability. No changes will be made to the gross negligence penalty.
Alternative Arguments in Assessments
The Income Tax Act will be amended to clarify that the CRA can increase or adjust an amount included in an assessment while that assessment is under objection or appeal, provided that the total amount of the assessment does not increase.
Legal Representatives for Registered Disability Savings Plans (RDSP)
Budget 2015 extends, until the end of 2018, a previously introduced temporary measure to allow a qualifying family member to become the RDSP holder for an adult individual lacking capacity.
Information Sharing for Collections
The CRA collects debts owing under both tax and non-tax programs. Currently, taxpayer information cannot be shared between CRA staff collecting tax and non-tax debts. Upon royal assent to the relevant legislation, such information sharing will be permitted.
Aboriginal Tax Policy
The government reiterates its support for direct taxation arrangements with Aboriginal governments.
Previously Announced Measures
The budget confirms that the government will proceed with the following previously announced measures:
The government will also move forward with technical amendments to improve the certainty of the tax system.
. Such as the Limitation on Benefits Article in the Canada-U.S. Income Tax Convention, which includes both an active trade or business test and a derivative benefits test under which a "non-qualifying" US resident (e.g. a US corporation that is controlled by third-country residents) may access treaty benefits.
. Much of the criticism focused on the fact that the rule, as proposed, appeared to confer a great deal of discretion on the tax authorities on whether treaty benefits should be allowed, whereas a US-style LOB can be applied considerably more objectively.
PwC Canada assists you with your tax planning needs, by sharing our analysis on issues relating to Canada's budget announcements as they happen.
Our reactions and insights to the Federal Budget, tabled on April 21, 2015 by Federal Minister of Finance, Joe Oliver, are available here.