Tax Measures: Supplementary Information
This annex provides detailed information on each of the tax measures proposed in the Budget.
Table 1 lists these measures and provides estimates of their budgetary impact.
The annex also provides the Notices of Ways and Means Motions to amend the Income Tax Act, the Excise Tax Act, the Excise Act, 2001 and other related legislation and draft amendments to related regulations.
In this annex, references to “Budget Day” are to be read as references to the day on which this Budget is presented.
|Personal Income Tax|
|Canada Training Credit||-||35||155||185||210||230||815|
|Less savings due to claimed amounts not qualifying under the Tuition Tax Credit||-||(5)||(20)||(25)||(25)||(30)||(105)|
|Home Buyers’ Plan – Withdrawal Limit||-||20||20||20||20||20||100|
|Home Buyers’ Plan – Breakdown of a Marriage or Common-Law Partnership||-||5||10||10||10||10||45|
|Change in Use Rules for Multi-Unit Residential Properties*||-||-||-||-||-||-||-|
|Permitting Additional Types of Annuities under Registered Plans – Advanced Life Deferred Annuities*||-||-||-||2||4||5||11|
|Permitting Additional Types of Annuities under Registered Plans – Variable Payment Life Annuities*||-||-||-||-||-||-||-|
|Registered Disability Savings Plan – Cessation of Eligibility for the Disability Tax Credit3||-||3||17||28||30||31||109|
|Tax Measures for Kinship Care Providers*||-||-||-||-||-||-||-|
|Donations of Cultural Property||-||-||-||-||-||-||-|
|Medical Expense Tax Credit*||-||-||-||-||-||-||-|
|Contributions to a Specified Multi-Employer Plan for Older Members*||-||-||-||-||-||-||-|
|Pensionable Service Under an Individual Pension Plan||-||-||-||-||-||-||-|
|Mutual Funds: Allocation to Redeemers Methodology||-||(25)||(105)||(90)||(75)||(55)||(350)|
|Carrying on a Business in a Tax-Free Savings Account*||-||-||-||-||-||-||-|
|Electronic Delivery of Requirements for Information*||-||-||-||-||-||-||-|
|Business Income Tax|
|Business Investment in
|Small Business Deduction – Farming and Fishing||-||-||-||-||-||-||-|
|Scientific Research and Experimental Development Program||-||5||80||100||105||105||395|
|Canadian-Belgian Co-productions – Canadian Film or Video Production Tax Credit*||-||-||-||-||-||-||-|
|Character Conversion Transactions||-||-||-||-||-||-||-|
|Support for Canadian Journalism|
|Qualified Donee Status||-||6||25||32||22||11||96|
|Refundable Labour Tax Credit||-||-||75||95||95||95||360|
|Tax Credit for Digital Subscriptions||-||5||26||31||36||41||138|
|Less: Amounts Provisioned in the Fiscal Framework||-||(45)||(105)||(130)||(150)||(165)||(595)|
|International Tax Measures|
|Transfer Pricing Measures||-||-||-||-||-||-||-|
|Foreign Affiliate Dumping||-||-||-||-||-||-||-|
|Cross-Border Share Lending Arrangements||-||-||-||-||-||-||-|
|Sales and Excise Tax Measures|
|GST/HST Health Measures||-||-||-||-||-||-||-|
|Total Tax Measures Included in Budget 2019|
|Net Fiscal Impact||-||18||199||298||372||398||1,284|
|Of Which: Amounts Only in this Annex (*)||-||-||-||2||4||5||11|
Personal Income Tax Measures
Canada Training Credit
Budget 2019 proposes to introduce the Canada Training Benefit to address barriers to professional development for working Canadians. The Canada Training Benefit will include as one of its key components the new Canada Training Credit, a refundable tax credit aimed at providing financial support to help cover up to half of eligible tuition and fees associated with training. Eligible individuals will accumulate $250 each year in a notional account which can be accessed for this purpose.
In order to accumulate the amount of $250 in respect of a year, an individual must:
- file a tax return for the year;
- be at least 25 years old and less than 65 years old at the end of the year;
- be resident in Canada throughout the year;
- have earnings (including income from an office or employment, self-employment income, Maternity and Parental Employment Insurance benefits or benefits paid under the Act respecting parental insurance, the taxable part of scholarship income, and the tax-exempt part of earnings of status Indians and emergency service volunteers) of $10,000 or more in the year; and
- have individual net income for the year that does not exceed the top of the third tax bracket for the year ($147,667 in 2019).
A taxpayer’s notional account balance will be communicated to them each year in their Notice of Assessment and will be available through the Canada Revenue Agency’s My Account portal. The amount of a credit that can be claimed for a taxation year will be equal to the lesser of half of the eligible tuition and fees paid in respect of the taxation year and the individual’s notional account balance for the taxation year (based on amounts used or accumulated in respect of previous years). The amount claimed will offset, dollar for dollar, tax otherwise payable or will be refunded to the individual to the extent that the amount exceeds tax otherwise payable.
An individual who claims the credit for a given taxation year may still accumulate an entitlement to $250 in respect of that year. The credit will be available to be claimed for a taxation year even if the individual’s earnings or income preclude them from accumulating an amount in respect of that year. However, an individual must be resident in Canada throughout a year to claim the credit for the year.
Individuals will be able to accumulate up to a maximum amount of $5,000 over a lifetime. Any unused balance will expire at the end of the year in which an individual turns 65.
- Michelle is eligible to accumulate an amount of $250 in respect of each year starting in 2019. Her notional account balance for 2023 is $1,000.
- In 2023, Michelle enrols in training and pays $1,500 in eligible tuition fees. She can claim a refundable tax credit worth $750 for the 2023 taxation year.
- Michelle is also eligible to accumulate an amount of $250 in respect of 2023. As a result, her notional account balance for 2024 is $500 ($250 in unused balance from the prior year in addition to the annual $250 amount). She will then be able to accumulate up to an additional $3,750 in her notional account over her lifetime.
Eligible Tuition and Other Fees
Tuition and other fees eligible for the Canada Training Credit will generally be the same as under the existing rules for the Tuition Tax Credit, a 15-per-cent non-refundable tax credit on fees paid in respect of a year for an individual enrolled at an eligible educational institution. In particular, eligible fees will include:
- tuition fees;
- ancillary fees and charges (e.g., admission fees, exemption fees and charges for a certificate, diploma or degree); and
- examination fees.
As in the case of the Tuition Tax Credit, an eligible educational institution in Canada will be:
- a university, college or other educational institution providing courses at a post-secondary level; or
- an institution providing occupational-skills courses that is certified by the Minister of Employment and Social Development.
Unlike the Tuition Tax Credit, educational institutions outside of Canada will not be eligible for the purpose of the Canada Training Credit.
The portion of the tuition fees refunded through the Canada Training Credit will not qualify as eligible expenses under the Tuition Tax Credit. The difference between the total eligible fees and the portion refunded through the Canada Training Credit will continue to qualify as eligible fees under the Tuition Tax Credit. In the example above, Michelle would have $750 of eligible fees for the purposes of the Tuition Tax Credit (i.e., $1,500 of total eligible fees less the $750 refunded through the Canada Training Credit).
This measure will apply to the 2019 and subsequent taxation years. Consequently, the annual accumulation to the notional account will start based on eligibility in respect of the 2019 taxation year and the credit will be available to be claimed for expenses in respect of the 2020 taxation year.
Earning and income thresholds under the Canada Training Credit will be subject to annual indexation.
Home Buyers’ Plan
The home buyers’ plan (HBP) helps first-time home buyers save for a down payment by allowing them to withdraw up to $25,000 from a registered retirement savings plan (RRSP) to purchase or build a home without having to pay tax on the withdrawal. First-time home buyers purchasing a home jointly may each withdraw up to $25,000 from their own RRSP under the HBP.
Amounts withdrawn under the HBP must be repaid to an RRSP over a period not exceeding 15 years, starting the second year following the year in which the withdrawal was made. A special rule denies an RRSP deduction for contributions that are withdrawn under the HBP within 90 days of being contributed.
For HBP purposes, an individual is not considered to be a first-time home buyer if, in the relevant calendar year or in any of the four preceding calendar years,
- the individual, or the individual’s spouse or common-law partner, owned and occupied another home, and
- that home was the individual’s principal place of residence.
To provide first-time home buyers with greater access to their RRSPs to purchase or build a home, Budget 2019 proposes to increase the HBP withdrawal limit to $35,000 from $25,000. As a result, a couple will potentially be able to withdraw $70,000 from their RRSPs to purchase a first home.
Special rules under the HBP apply to facilitate the acquisition of a home that is more accessible or better suited for the personal needs and care of an individual who is eligible for the disability tax credit, even if the first-time home-buyer requirement is not met. For these cases, the rules will also be modified to provide the same $35,000 withdrawal limit.
This increase in the HBP withdrawal limit will apply to the 2019 and subsequent calendar years in respect of withdrawals made after Budget Day.
Breakdown of a Marriage or Common-Law Partnership
Budget 2019 also proposes to extend access to the HBP in order to help Canadians maintain homeownership after the breakdown of a marriage or common-law partnership.
Generally, an individual will not be prevented from participating in the HBP because they do not meet the first-time home buyer requirement, provided that the individual lives separate and apart from their spouse or common-law partner for a period of at least 90 days as a result of a breakdown in their marriage or common-law partnership. The individual will be able to make a withdrawal under the HBP if the individual lives separate and apart from their spouse or common-law partner at the time of the withdrawal and began to live separate and apart in the year in which the withdrawal is made or any time in the four preceding years. However, in the case where an individual’s principal place of residence is a home owned and occupied by a new spouse or common-law partner, the individual will not be able to make an HBP withdrawal under these rules.
An individual will be required to dispose of their previous principal place of residence no later than two years after the end of the year in which the HBP withdrawal is made. The requirement to dispose of the previous principal place of residence will be waived for individuals buying out the share of the residence owned by the individual’s spouse or common-law partner. The existing rule that individuals may not acquire the home more than 30 days before making the HBP withdrawal will also be waived in this circumstance.
Existing HBP rules will otherwise generally apply. For example, an individual’s outstanding HBP balance must be nil at the beginning of the year in which the individual makes an HBP withdrawal.
This measure will apply to HBP withdrawals made after 2019.
Change in Use Rules for Multi-Unit Residential Properties
The Income Tax Act deems a taxpayer to have disposed of, and reacquired, a property when the taxpayer converts the property from an income-producing use (e.g., a rental property) to a personal use (e.g., a residential property) or vice versa. Where the use of an entire property is changed to an income-producing use, or an income-producing property becomes a principal residence, the taxpayer may elect that this deemed disposition not apply. As a consequence, the election can provide a deferral of the realization of any accrued capital gain on the property until it is realized on a future disposition.
As well, where an election is made on a conversion of a property to or from a principal residence, the property can be designated as a taxpayer’s principal residence for an additional period of up to four years before or after the period for which the taxpayer could otherwise claim the principal residence exemption in respect of the property (provided no other principal residence exemption is claimed in respect of those additional years).
The deemed disposition also occurs when the use of part of a property is changed. For example, this can occur where a taxpayer owns a multi-unit residential property, such as a duplex, and either starts renting or moves into one of the units. However, under the current rules, a taxpayer cannot elect out of the deemed disposition that arises on a change in use of part of a property.
To improve the consistency of the tax treatment of owners of multi-unit residential properties in comparison to owners of single-unit residential properties, Budget 2019 proposes to allow a taxpayer to elect that the deemed disposition that normally arises on a change in use of part of a property not apply.
This measure will apply to changes in use of property that occur on or after Budget Day.
Permitting Additional Types of Annuities Under Registered Plans
The tax rules allow funds from certain registered plans to be used to purchase an annuity to provide income in retirement, subject to specified conditions. In exchange for a lump-sum amount of funds, an annuity provides a stream of periodic payments to an individual (i.e., the annuitant), generally for a fixed term, for the life of the annuitant or for the joint lives of the annuitant and the annuitant’s spouse or common-law partner.
To provide Canadians with greater flexibility in managing their retirement savings, Budget 2019 proposes to permit two new types of annuities under the tax rules for certain registered plans:
- advanced life deferred annuities will be permitted under a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), deferred profit sharing plan (DPSP), pooled registered pension plan (PRPP) and defined contribution registered pension plan (RPP); and
- variable payment life annuities will be permitted under a PRPP and defined contribution RPP.
The measures will apply to the 2020 and subsequent taxation years.
Advanced Life Deferred Annuities
The tax rules generally require an annuity purchased with registered funds to commence by the end of the year in which the annuitant attains 71 years of age.
Budget 2019 proposes to amend the tax rules to permit an advanced life deferred annuity (ALDA) to be a qualifying annuity purchase, or a qualified investment, under certain registered plans. An ALDA will be a life annuity the commencement of which may be deferred until the end of the year in which the annuitant attains 85 years of age.
An ALDA will be a qualifying annuity purchase under an RRSP, RRIF, DPSP, PRPP and defined contribution RPP. An ALDA will also be a qualified investment for a trust governed by an RRSP or a RRIF. Qualifying plan terms may need to be amended in order to permit the purchase of an ALDA under such plans.
The value of an ALDA will not be included for the purpose of calculating the minimum amount required to be withdrawn in a year from a RRIF, a PRPP member’s account or a defined contribution RPP member’s account, after the year in which the ALDA is purchased.
An individual will be subject to a lifetime ALDA limit equal to 25 per cent of a specified amount in relation to a particular qualifying plan. The specified amount will equal the sum of:
- the value of all property (other than most annuities, including ALDAs) held in the qualifying plan as at the end of the previous year; and
- any amounts from the qualifying plan used to purchase ALDAs in previous years.
In practice, this limit will apply only when an ALDA is purchased or when an additional amount is added to an existing ALDA contract. As a result, an individual will not be required to surrender or dispose of ALDAs in situations where the value of ALDA purchases in previous years exceeds the individual’s lifetime ALDA limit for a particular year due to a decline in qualifying plan assets.
An individual will also be subject to a comprehensive lifetime ALDA dollar limit of $150,000 from all qualifying plans. The lifetime ALDA dollar limit will be indexed to inflation for taxation years after 2020, rounded to the nearest $10,000.
In order to qualify as an ALDA, the annuity contract will need to state that it intends to qualify as an ALDA and will need to satisfy certain requirements. These include the requirements that the annuity contract:
- provide annual or more frequent periodic payments for the life of the annuitant, or for the joint lives of the annuitant and annuitant’s spouse or common-law partner, commencing no later than the end of the year in which the annuitant attains 85 years of age;
- provide, when the annuitant under a joint-life contract dies prior to commencement, payments that commence to the surviving spouse or common-law partner no later than the time at which the payments would have commenced if the annuitant had not died, where the value of the periodic payments must, if the payments commence before that time, be adjusted in accordance with generally accepted actuarial principles;
- provide periodic payments which are equal, except to the extent they are:
- adjusted annually to reflect in whole or in part changes to the Consumer Price Index or a fixed rate specified in the annuity contract not to exceed two per cent per year, or
- reduced on the death of the annuitant or the annuitant’s spouse or common-law partner;
- provide that, following the death of the annuitant, a lump-sum death benefit (if any) provided to a beneficiary does not exceed the premium paid for the annuity less the sum of all payments received by the annuitant or, in the case of a joint-life contract, the sum of all payments received by the annuitant and the annuitant’s spouse or common-law partner prior to death;
- permit a refund to the annuitant of any portion of the premium paid for the contract to the extent that the premium paid for the contract exceeded the annuitant’s ALDA limit; and
- provide no other payments, such as commutation or cash surrender payments, or payments under a guarantee period.
Tax treatment on death
Annuity payments to the surviving spouse or common-law partner of a deceased annuitant under a joint-life contract will be included in the income of the surviving spouse or common-law partner for tax purposes.
If the beneficiary of a lump-sum death benefit (i.e., a return of all or a portion of the premium paid to purchase the annuity) is the deceased annuitant’s surviving spouse or common-law partner, or a financially dependent child or grandchild of the deceased annuitant, the lump-sum death benefit will be included in the income of the beneficiary for tax purposes. All or a portion of that amount will be permitted to be transferred on a tax-deferred basis (or “rollover” basis) to the RRSP, RRIF or other qualifying vehicle of the beneficiary provided that, where the beneficiary is a financially dependent child or grandchild, the beneficiary was dependent on the deceased annuitant by reason of physical or mental infirmity.
If the beneficiary of a lump-sum death benefit is neither the deceased annuitant’s surviving spouse or common-law partner nor a financially dependent child or grandchild of the deceased annuitant, the lump-sum death benefit paid to a beneficiary will be included in the income of the deceased annuitant for tax purposes in the year of death.
If an individual purchases ALDA contracts in excess of their ALDA limit, a tax of one per cent per month will apply to the excess portion. All or some of the tax on the excess portion may be waived or cancelled if the annuitant establishes the excess portion was paid as a consequence of a reasonable error, and the amount of the excess portion is returned to an RRSP, RRIF or other eligible vehicle of the annuitant by the end of the year following the year in which the excess portion was paid.
If an annuity contract that is intended to qualify as an ALDA does not comply with the ALDA requirements, it will be considered to be a non-qualifying annuity purchase or a non-qualified investment, as the case may be, and will be subject to the existing rules and taxes that apply to such purchases and investments.
Additional rules will be included, as necessary, in the draft amendments for the measure to be released for public comment.
Variable Payment Life Annuities
The tax rules generally require that retirement benefits from a PRPP or defined contribution RPP be provided to a member by means of a transfer of funds from the member’s account to an RRSP or RRIF of the member, variable benefits paid from the member’s account or an annuity purchased from a licensed annuities provider. However, in-plan annuities (annuities provided to members directly from a PRPP or defined contribution RPP) are generally not permitted under the tax rules.
Budget 2019 proposes to amend the tax rules to permit PRPPs and defined contribution RPPs to provide a variable payment life annuity (VPLA) to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.
PRPP and defined contribution RPP administrators will be permitted to establish a separate annuities fund under the plan to receive transfers of amounts from members’ accounts to provide VPLAs. Only transfers from a member’s account will be permitted to be made to the annuities fund. Direct employee and employer contributions to the annuities fund will not be permitted.
A minimum of 10 retired members will be required to participate in a VPLA arrangement in order for a plan to establish such an arrangement and it must be reasonable to expect that at least 10 retired members will participate in the arrangement on an ongoing basis.
VPLAs will be required to comply with certain existing tax rules applicable to PRPPs and defined contribution RPPs, as well as additional requirements. Specifically, a VPLA must:
- commence payments by the later of the end of the year in which the member attains 71 years of age and the end of the calendar year in which the VPLA is acquired;
- provide annual or more frequent periodic payments, after commencement, for the life of the annuitant, or for the joint-lives of the annuitant and the annuitant’s spouse or common-law partner;
- provide periodic payments that reflect the value of the amount transferred from the member’s account to acquire the VPLA, in accordance with generally accepted actuarial principles;
- provide periodic payments which are equal, except to the extent they are:
- adjusted annually to reflect in whole or in part changes to the Consumer Price Index or a fixed rate specified in the annuity contract not to exceed two per cent per year,
- reduced on the death of the annuitant or the annuitant’s spouse or common-law partner, or
- adjusted to reflect the investment performance of the annuities fund and the mortality experience of the pool of VPLA annuitants;
- adjust periodic payments on an annual basis to reflect the investment performance of the annuities fund, if the investment performance differs materially compared to the investment performance under the assumptions on which the VPLA payments are based;
- adjust periodic payments on an annual basis to reflect the mortality experience of VPLA annuitants, if the mortality experience differs materially compared to the mortality assumptions on which the VPLA payments are based;
- provide that continuing periodic payments to a beneficiary under a guarantee period following the death of the annuitant, or the annuitant’s spouse or common-law partner, reflect the periodic payments that would have been payable to the annuitant, or the annuitant’s spouse or common-law partner, if they were alive; and
- provide that the commuted value of any remaining periodic payments payable to a beneficiary under a guarantee period following the death of the annuitant, or the annuitant’s spouse or common-law partner, be determined in accordance with generally accepted actuarial principles.
Tax treatment on death
The tax treatment of VPLAs on the death of the annuitant will reflect the existing tax treatment of annuities purchased with PRPP and defined contribution RPP savings.
The existing rules for PRPPs and defined contribution RPPs relating to non-compliance will apply in respect of non-compliance with the tax rules for VPLAs.
Additional rules will be included, as necessary, in the draft amendments for the measure to be released for public comment.
Pension benefits standards legislation
The Government will consult on potential changes to federal pension benefits standards legislation to accommodate VPLAs for federally regulated PRPPs and defined contribution RPPs. To the extent that provinces wish to accommodate VPLAs for provincially regulated PRPPs and defined contribution RPPs, they may need to amend their provincial pension benefits standards legislation.
Registered Disability Savings Plan – Cessation of Eligibility for the Disability Tax Credit
The registered disability savings plan (RDSP) is a tax-assisted savings vehicle intended to help an individual with a disability – and the individual’s family – save for the individual’s long-term financial security. An RDSP may be established only for a beneficiary who is eligible for the disability tax credit (DTC).
To encourage long-term saving, the Government of Canada supplements private RDSP contributions with Canada Disability Savings Grants and provides Canada Disability Savings Bonds under the Canada Disability Savings Program. These grants and bonds are eligible to be paid into an RDSP until the end of the year in which a beneficiary of the RDSP turns 49 years of age.
When a beneficiary of an RDSP ceases to be eligible for the DTC, no contributions may be made to, and no Canada Disability Savings Grants and Canada Disability Savings Bonds may be paid into, the RDSP. The income tax rules generally require that the RDSP be closed by the end of the year following the first full year throughout which the beneficiary is not eligible for the DTC.
An RDSP issuer is required to set aside an amount (referred to as the “assistance holdback amount”) equivalent to the total Canada Disability Savings Grants and Canada Disability Savings Bonds paid into the RDSP in the preceding 10 years, less any of these grants and bonds that have been repaid in respect of that 10-year period. This requirement ensures that RDSP funds are available to meet potential repayment obligations. Upon plan closure, the assistance holdback amount must be repaid to the Government. Any assets remaining in the RDSP after this repayment are paid to the beneficiary.
Previous amendments to the Income Tax Act allow an RDSP plan holder to elect to extend the period for which an RDSP may remain open after a beneficiary becomes ineligible for the DTC. To qualify for this extension, a medical practitioner must certify in writing that the nature of the beneficiary’s condition makes it likely that the beneficiary will, because of the condition, be eligible for the DTC in the foreseeable future.
During the period for which an election is valid, the following rules apply, commencing with the first full calendar year throughout which the beneficiary is no longer eligible for the DTC:
- No contributions to the RDSP, including rollovers of registered education savings plan investment income, are permitted. The income tax rules do permit, however, a rollover of proceeds from a deceased individual’s registered retirement savings plan or registered retirement income fund to the RDSP of a financially dependent infirm child or grandchild.
- The beneficiary is not eligible to receive Canada Disability Savings Grants or Canada Disability Savings Bonds and no new entitlements are generated in respect of any year throughout which the beneficiary is ineligible for the DTC.
- If the beneficiary dies during the election period, the RDSP is closed and the assistance holdback amount, determined immediately prior to the beneficiary becoming ineligible for the DTC, must be repaid to the Government.
- Withdrawals from the RDSP are permitted, subject to the regular repayment rules and the maximum and minimum withdrawal rules. For example, for each $1 withdrawn from an RDSP, $3 of any Canada Disability Savings Grants or Canada Disability Savings Bonds paid into the plan in the 10 years preceding the withdrawal must be repaid, up to the maximum of the assistance holdback amount, determined immediately prior to the beneficiary becoming ineligible for the DTC (referred to as the “proportional repayment rule”).
An election is generally valid until the end of the fourth calendar year following the first full calendar year throughout which a beneficiary is ineligible for the DTC. If a beneficiary becomes eligible for the DTC while an election is valid, the regular RDSP rules apply commencing with the year in which the beneficiary becomes eligible. If the beneficiary does not regain eligibility for the DTC during the election period, the RDSP must be closed by the end of the first year following the end of the election period and the assistance holdback amount, determined immediately prior to cessation of the beneficiary’s eligibility for the DTC, must be repaid to the Government.
Concerns have been raised that the requirements that an RDSP be closed and the assistance holdback amount repaid to the Government upon loss of eligibility for the DTC do not appropriately recognize the period of severe and prolonged disability experienced by an RDSP beneficiary.
Budget 2019 proposes to remove the time limitation on the period that an RDSP may remain open after a beneficiary becomes ineligible for the DTC and to eliminate the requirement for medical certification that the beneficiary is likely to become eligible for the DTC in the future in order for the plan to remain open. The general rules that currently apply in respect of a period during which an election is valid, as described above, will apply to an RDSP in any period during which the beneficiary is ineligible for the DTC, with the following modifications:
- There will be no requirement for medical certification that the individual is likely to become eligible for the DTC in the future.
- Withdrawals from the RDSP will be subject to the proportional repayment rule, but the assistance holdback amount will be modified, depending on the beneficiary’s age, in the following manner:
- For years throughout which the beneficiary is ineligible for the DTC that are prior to the year in which the beneficiary turns 51 years of age, the assistance holdback amount will be equal to the assistance holdback amount determined immediately prior to the beneficiary becoming ineligible for the DTC, less any repayments made after the beneficiary becomes ineligible for the DTC.
- Over the following 10 years, the assistance holdback amount will be reduced based on Canada Disability Savings Grants and Canada Disability Savings Bonds paid into the RDSP during a reference period. This reference period is initially the 10 years immediately prior to the beneficiary becoming ineligible for the DTC. Each year after the year in which the beneficiary turns 50 years of age, the reference period is reduced by a year. For example, for the year in which the beneficiary turns 51 years of age, the reference period will be the nine-year period immediately prior to the beneficiary becoming ineligible for the DTC. The assistance holdback amount will be equal to the amount of grants and bonds paid into the RDSP in those nine years, less any repayments of those amounts.
- A rollover of proceeds from a deceased individual’s registered retirement savings plan or registered retirement income fund to the RDSP of a financially dependent infirm child or grandchild will be permitted only if the rollover occurs by the end of the fourth calendar year following the first full calendar year throughout which the beneficiary is ineligible for the DTC.
- A plan holder may, at any time during which the beneficiary is ineligible for the DTC, request closure of the RDSP of the beneficiary. Closure of an RDSP will be subject to the general rules that apply in the event of a closure, with the exception that the amount required to be repaid upon closure will be equal to the assistance holdback amount at that time, as modified above.
- Bruce’s parents open an RDSP for him in 2009 at age five and contribute $1,500 to his plan annually for 10 years, attracting the maximum amount of Canada Disability Savings Grants ($3,500) each year. For 2019, the assistance holdback amount for his plan equals $35,000. While his parents continue to contribute $1,500 to his plan each year for the subsequent five years (attracting the maximum $3,500 annually in Canada Disability Savings Grants), the assistance holdback amount for his plan remains at $35,000, as grants received during the first five years that fall out of the assistance holdback amount, are replaced with new grant amounts.
- The effects of Bruce’s disability improve such that he is determined to no longer be eligible for the DTC after 2023. Under the current rules, unless Bruce regains eligibility for the DTC, his plan would have to be closed by the end of 2025 (or by the end of 2029 under an election) and all Canada Disability Savings Grants received over the 2014 to 2023 period would have to be repaid.
- Under the proposed approach, Bruce could choose not to close his plan. While his plan remains open:
- Withdrawals are allowed (up to the assistance holdback amount and subject to the repayment rules and the minimum and maximum withdrawal rules) but no contributions are permitted (except a rollover from an eligible registered retirement savings plan or registered retirement income fund before the end of 2028).
- His assistance holdback amount is frozen at $35,000 until the year he turns age 51 (in 2055), when the amount of his assistance holdback amount begins to decline by $3,500 each year.
By 2064, the year Bruce turns age 60, he will be able to withdraw amounts from his RDSP and no longer be required to repay Canada Disability Savings Grants, as his assistance holdback amount has now been reduced to zero.
If a beneficiary regains eligibility for the DTC, the regular RDSP rules will apply commencing with the year in which the beneficiary becomes eligible for the DTC. For example, contributions will be permitted and new Canada Disability Savings Grants and Canada Disability Savings Bonds may be paid into the RDSP. Should the beneficiary become ineligible for the DTC at some later time, the proposed rules in respect of DTC ineligibility will resume.
This measure will apply after 2020. An RDSP issuer will not, however, be required to close an RDSP on or after Budget Day and before 2021 solely because the RDSP beneficiary is no longer eligible for the DTC.
Tax Measures for Kinship Care Providers
A number of provinces and territories offer kinship and close-relationship care programs (referred to as kinship care programs), such as the Prince Edward Island Grandparents and Care Providers program, as alternatives to foster care (or other formal care by the state) for children in need of protection who require out-of-home care on a temporary basis. As part of their kinship care programs, some of these jurisdictions provide financial assistance to care providers to help defray the costs of caring for the child.
Canada Workers Benefit
The Canada Workers Benefit is a refundable tax credit that supplements the earnings of low-income workers and improves work incentives for low-income Canadians. A higher benefit amount is provided to eligible families (couples and single parents) than to single individuals without dependants.
In order for an individual to be eligible as a single parent under the Canada Workers Benefit, the individual must be the parent of a child with whom the individual resides at the end of the taxation year. For income tax purposes, a parent includes an individual upon whom a child is wholly dependent for support. A concern has been raised that receipt of financial assistance under a kinship care program could preclude a care provider from being considered to be the parent of a child in their care for the purposes of the Canada Workers Benefit.
Budget 2019 proposes to amend the Income Tax Act to clarify that an individual may be considered to be the parent of a child in their care for the purpose of the Canada Workers Benefit, regardless of whether they receive financial assistance from a government under a kinship care program. Kinship care providers will thus be eligible for the Canada Workers Benefit amount available for families, provided all other eligibility requirements are met.
This measure will apply for the 2009 and subsequent taxation years.
Tax Treatment of Financial Assistance Payments
Under the Income Tax Act, social assistance payments made on the basis of a means, needs or income test are not taxable but must be included in income for the purposes of determining entitlement to income-tested benefits and credits. A concern has been raised that financial assistance payments received under certain kinship care programs may reduce benefit levels for some lower-income kinship care providers.
Budget 2019 also proposes to amend the Income Tax Act to clarify that financial assistance payments received by care providers under a kinship care program are neither taxable, nor included in income for the purposes of determining entitlement to income-tested benefits and credits.
This measure will apply for the 2009 and subsequent taxation years.
Donations of Cultural Property
The Government of Canada provides certain enhanced tax incentives to encourage donations of cultural property to certain designated institutions and public authorities in Canada, in order to ensure that such property remains in Canada for the benefit of Canadians. The enhanced tax incentives include a charitable donation tax credit (for individuals) or deduction (for corporations), which may eliminate the donor’s tax liability for a year, and an exemption from income tax for any capital gains arising on the disposition.
To qualify for the incentives, a donated property must be of “outstanding significance” by reason of its close association with Canadian history or national life, its aesthetic qualities or its value in the study of the arts or sciences. In addition, it must be of “national importance” to such a degree that its loss to Canada would significantly diminish the national heritage. These requirements are set out in the Cultural Property Export and Import Act and are also used to regulate the export of cultural property out of Canada.
A recent court decision related to the export of cultural property interpreted the “national importance” test as requiring that a cultural property have a direct connection with Canada’s cultural heritage. This decision has raised concerns that certain donations of important works of art that are of outstanding significance but of foreign origin may not qualify for the enhanced tax incentives.
To address these concerns, Budget 2019 proposes to amend the Income Tax Act and the Cultural Property Export and Import Act to remove the requirement that property be of “national importance” in order to qualify for the enhanced tax incentives for donations of cultural property. No changes are proposed that would affect the export of cultural property.
This measure will apply in respect of donations made on or after Budget Day.
Medical Expense Tax Credit
The medical expense tax credit is a 15-per-cent non-refundable tax credit that recognizes the effect of above-average medical or disability-related expenses on an individual’s ability to pay tax. For 2019, the medical expense tax credit is available for qualifying medical expenses in excess of the lesser of $2,352 and three per cent of the individual’s net income.
Amounts paid for cannabis products may be eligible for the medical expense tax credit where such products are purchased for a patient for medical purposes in accordance with the Access to Cannabis for Medical Purposes Regulations, under the Controlled Drugs and Substances Act. However, cannabis is no longer regulated under this Act. Instead, as of October 17, 2018, access to cannabis is subject to the Cannabis Regulations, under the Cannabis Act. Eligible expenses for the medical expense tax credit will also include expenses for other classes of cannabis products purchased for a patient for medical purposes, once they become permitted for legal sale under the Cannabis Act.
Budget 2019 proposes to amend the Income Tax Act to reflect the current regulations for accessing cannabis for medical purposes.
This measure will apply to expenses incurred on or after October 17, 2018.
Contributions to a Specified Multi-Employer Plan for Older Members
In general, the pension tax rules effectively ensure that contributions to a defined benefit registered pension plan (RPP) in respect of a member are not made after the member can no longer accrue further pension benefits. Under the tax rules, pension benefits may not be accrued by a member after the end of the year in which the member attains 71 years of age or if the member has returned to work for the same or a related employer and is receiving a pension from the plan (except under a qualifying phased retirement program).
However, in the case of a specified multi-employer plan (SMEP), a specific type of union-sponsored, defined benefit pension plan, employer contributions are deemed to be eligible contributions in order to ensure that such plans can operate effectively under the pension tax rules. Consequently, and in contrast to other defined benefit RPPs, employers are not prevented by the pension tax rules from making contributions to a SMEP in respect of workers over age 71 or those receiving a pension from the plan, if such contributions are required by the plan. Furthermore, in requiring an employer to contribute in respect of employed union members, some collective bargaining agreements and SMEP plan terms do not prevent contributions in respect of workers in these situations. Such contributions do not benefit the member because they can no longer accrue any corresponding pension benefits under the plan.
To bring the SMEP rules in line with the pension tax provisions that apply to other defined benefit RPPs, Budget 2019 proposes to amend the tax rules to prohibit contributions to a SMEP in respect of a member after the end of the year the member attains 71 years of age and to a defined benefit provision of a SMEP if the member is receiving a pension from the plan (except under a qualifying phased retirement program). The proposed changes will ensure that employers do not make pension contributions on behalf of older SMEP members in these situations from which they cannot benefit.
To provide SMEP sponsors and employers with a flexible transition period, this measure will apply in respect of SMEP contributions made pursuant to collective bargaining agreements entered into after 2019, in relation to contributions made after the date the agreement is entered into.
Pensionable Service Under an Individual Pension Plan
An individual pension plan (IPP) is a defined benefit registered pension plan that has fewer than four members, at least one of whom (e.g., a controlling shareholder) is related to an employer that participates in the plan. IPPs provide businesses with a mechanism to provide lifetime retirement benefits to owner-managers in respect of their employment.
When an individual terminates membership in a defined benefit registered pension plan, the income tax rules allow for a tax-deferred transfer of all or a portion of the commuted value of the member’s accrued benefits in one of two ways:
- a transfer of the full commuted value to another defined benefit plan sponsored by another employer; or
- subject to a prescribed transfer limit (normally about 50 per cent of the member’s commuted value), a transfer of a portion of the commuted value to the member’s registered retirement savings plan or similar registered plan.
Planning is being undertaken that seeks to circumvent these prescribed transfer limits. This planning is effected by establishing an IPP sponsored by a newly incorporated private corporation controlled by an individual who has terminated employment with their former employer. The individual then transfers the commuted value of their pension entitlement from the former employer’s defined benefit plan to the new IPP. This planning seeks to obtain a 100-per-cent transfer of assets to the new IPP instead of the restricted transfer of assets to the individual’s registered retirement savings plan.
To prevent this inappropriate planning, Budget 2019 proposes to prohibit IPPs from providing retirement benefits in respect of past years of employment that were pensionable service under a defined benefit plan of an employer other than the IPP’s participating employer (or its predecessor employer). Any assets transferred from a former employer’s defined benefit plan to an IPP that relate to benefits provided in respect of prohibited service will be considered to be a non-qualifying transfer that is required to be included in the income of the member for income tax purposes.
This measure applies to pensionable service credited under an IPP on or after Budget Day.
Mutual Funds: Allocation to Redeemers Methodology
Mutual fund trusts are commonly used vehicles for the pooling and investment of funds. Although a mutual fund trust is considered to be a separate taxpayer, its conduit nature is recognized in the Income Tax Act. In particular, if a mutual fund trust’s capital gains or ordinary income for the year are allocated to its unitholders, the mutual fund trust will be entitled to a deduction for such allocated amounts in computing its income.
When a mutual fund trust disposes of investments to fund a redemption of its units, any accrued gain on the investments is realized by the trust and is subject to tax, and may be taxed again in the hands of the unitholder who disposes of units at a redemption price that reflects this accrued gain. Mutual fund trusts have access to a capital gains refund mechanism under the Income Tax Act, which is intended to address this potential for “double taxation”. This mechanism provides a refund to the mutual fund trust in respect of tax that the mutual fund trust has paid on its capital gains attributable to redeeming unitholders. However, because this mechanism is a formulaic approximation, it does not always fully relieve “double taxation”.
The “allocation to redeemers methodology” was developed to more effectively match the capital gains realized by the mutual fund trust on its investments with the capital gains realized by the redeeming unitholders on their units. This methodology, which is used by many mutual fund trusts, allows a mutual fund trust to allocate capital gains realized by it to a redeeming unitholder and claim a corresponding deduction. The allocated capital gains are included in computing the redeeming unitholder’s income but its redemption proceeds are reduced by that amount.
Certain mutual fund trusts have been using the allocation to redeemers methodology to allocate capital gains to redeeming unitholders in excess of the capital gains that would otherwise have been realized by these unitholders on the redemption of their units. This results in the following consequences:
- the mutual fund trust is allowed a deduction in respect of the full allocated amount;
- the redeeming unitholder is taxed on the same overall amount of capital gain as if no allocation were made to it; in particular, because the allocation reduces the unitholder’s redemption proceeds,
- a portion of the allocation effectively eliminates the capital gain that would have been realized by that unitholder on the redemption and so the unitholder is taxed only on that allocated portion, and
- the excess portion of the allocation effectively results in a capital loss on the redemption for that unitholder that completely offsets the portion of the allocation included in the unitholder’s income; and
- because the excess portion does not need to be allocated by the mutual fund trust to the remaining holders, it is reflected as an unrealized gain in the units held by them. This unrealized capital gain is taxed only when the remaining unitholders redeem their units.
From a policy perspective, any amount of capital gains realized by a mutual fund trust in a taxation year in excess of the capital gains realized by redeeming unitholders on their units in that year should be taxed in that taxation year either at the mutual fund trust level or, more typically, in the hands of the remaining unitholders. Therefore, this planning results in an inappropriate deferral of the taxation of the excess amount for these remaining unitholders.
Budget 2019 proposes to introduce a new rule that would deny a mutual fund trust a deduction in respect of the portion of an allocation made to a unitholder on a redemption of a unit of the mutual fund trust that is greater than the capital gain that would otherwise have been realized by the unitholder on the redemption, if the following conditions are met:
- the allocated amount is a capital gain; and
- the unitholder’s redemption proceeds are reduced by the allocation.
This measure will apply to taxation years of mutual fund trusts that begin on or after Budget Day.
Certain mutual fund trusts have also been using the allocation to redeemers methodology in a way that allows the mutual fund trust to convert the returns on an investment that would have the character of ordinary income to capital gains for their remaining unitholders. This character conversion planning is possible when the redeeming unitholders hold their units on income account but other unitholders hold their units on capital account.
Although this misuse of the allocation to redeemers methodology (as well as the planning described under “Deferral”) can be challenged by the Government based on existing rules in the Income Tax Act, these challenges could be both time-consuming and costly. As a result, the Government is proposing a specific legislative measure.
Budget 2019 proposes to introduce a new rule that will deny a mutual fund trust a deduction in respect of an allocation made to a unitholder on a redemption, if
- the allocated amount is ordinary income; and
- the unitholder’s redemption proceeds are reduced by the allocation.
This measure will apply to taxation years of mutual fund trusts that begin on or after Budget Day.
Carrying on Business in a Tax-Free Savings Account
The tax-free savings account (TFSA) is a registered account that allows Canadians to earn tax-free investment income on a wide range of investments. However, a TFSA is liable to pay tax under Part I of the Income Tax Act (at the top personal tax rate) on income from a business carried on by the TFSA or from non-qualified investments.
Under the current rules, the trustee of a TFSA (i.e., a financial institution) is jointly and severally liable with the TFSA for Part I tax while the holder of the TFSA is not. In cases where there are insufficient assets within the TFSA to pay any resulting tax liability (e.g., the TFSA holder withdraws the assets or transfers them to a different financial institution), the TFSA’s trustee is liable to pay the tax owing. In contrast, a holder of a TFSA is liable for any tax imposed under Part XI.01 of the Income Tax Act, which applies in respect of the acquisition of a non-qualified or a prohibited investment by the TFSA.
To recognize that a TFSA’s holder is typically in the best position to know whether the activities of the TFSA constitute carrying on a business, Budget 2019 proposes that the joint and several liability for tax owing on income from carrying on a business in a TFSA be extended to the TFSA holder. The joint and several liability of a trustee of a TFSA at any time in respect of business income earned by a TFSA will be limited to the property held in the TFSA at that time plus the amount of all distributions of property from the TFSA on or after the date that the notice of assessment is sent.
This measure will apply to the 2019 and subsequent taxation years.
Electronic Delivery of Requirements for Information
The Canada Revenue Agency (CRA) may issue a requirement for information to oblige a person to provide information or documents for the purposes of the administration and enforcement of various Acts. In many cases, the CRA must send requirements for information by registered mail, certified mail or personal service and is not permitted to send those requirements electronically.
Banks and credit unions are often sent requirements in respect of third-party financial information. These requirements for information are generally sent by registered mail, which is costly and impractical for both the CRA and the banks and credit unions receiving the requirements.
To improve the efficiency of the requirement-for-information process and to reduce administration and compliance costs, Budget 2019 proposes to allow the CRA to send requirements for information electronically to banks and credit unions by amending the following tax statutes: the Income Tax Act, the Excise Tax Act, the Excise Act, 2001 and the Air Travellers Security Charge Act. Budget 2019 further proposes similar amendments to Part 1 of the Greenhouse Gas Pollution Pricing Act, which is also administered by the CRA.
The CRA will be allowed to send requirements for information electronically to a bank or credit union only if the bank or credit union notifies the CRA that it consents to this method of service. This measure will change only the means by which the CRA can issue requirements for information and it will not expand the scope of information that can be requested by the CRA.
This measure will apply as of January 1, 2020.
Business Income Tax Measures
Support for Canadian Journalism
Budget 2019 proposes to introduce three new tax measures to support Canadian journalism:
- allowing journalism organizations to register as qualified donees;
- a refundable labour tax credit for qualifying journalism organizations; and
- a non-refundable tax credit for subscriptions to Canadian digital news.
These measures are intended to provide support to Canadian journalism organizations producing original news.
An independent panel will be established to recommend eligibility criteria for the purposes of these measures. Once the panel has made its recommendations, eligibility of organizations will be evaluated and a recognition process will be put in place.
Qualified Canadian Journalism Organizations
Qualified Canadian Journalism Organization (QCJO) status is a necessary condition for each of the three measures. In order to be a QCJO, an organization will be required to be recognized as meeting criteria developed by the independent panel. This recognition will be made by an administrative body that will be established for this purpose.
A QCJO will be required to be organized as a corporation, partnership or trust. It will need to operate in Canada and meet additional conditions, depending on how it is organized. To qualify as a QCJO, a corporation will be required to be incorporated and resident in Canada. In addition, its chairperson (or other presiding officer) and at least 75 per cent of its directors must be Canadian citizens. In general, in order for a partnership or trust to qualify, such corporations, along with Canadian citizens, must own at least 75 per cent of the interests in it.
In addition, an organization will be required to meet the following conditions to be a QCJO:
- it is primarily engaged in the production of original news content and in particular, the content
- must be primarily focused on matters of general interest and reports of current events, including coverage of democratic institutions and processes, and
- must not be primarily focused on a particular topic such as industry-specific news, sports, recreation, arts, lifestyle or entertainment;
- it regularly employs two or more journalists in the production of its content who deal at arm’s length with the organization;
- it must not be significantly engaged in the production of content
- to promote the interests, or report on the activities, of an organization, an association or their members,
- for a government, Crown corporation or government agency, or
- to promote goods or services; and
- it must not be a Crown corporation, municipal corporation or government agency.
Qualified Donee Status
The Government of Canada provides support to certain categories of organizations, including charities, that are referred to in the Income Tax Act as “qualified donees” and that operate for some broad public purpose. Canadians may claim the charitable donation tax credit (for individuals) or deduction for donations (corporations) for donations to qualified donees. Qualified donees can also receive gifts from Canadian registered charities.
Budget 2019 proposes to add registered journalism organizations as a new category of tax-exempt qualified donee. In order to qualify for registration, a QCJO will be required to apply to the Canada Revenue Agency (CRA) to be registered as a qualified donee and meet certain additional conditions, as described below.
Registered journalism organizations will be required to be corporations or trusts and to have purposes that exclusively relate to journalism. Any business activities carried on by these organizations will be required to be related to their purposes. For example, the sale of news content and advertising would be considered activities related to journalism. These organizations will not be permitted to distribute their profits, if any, or allow their income to be available for the personal benefit of certain individuals connected with the organization.
To ensure that registered journalism organizations are not used to promote the views or objectives of any particular person or related group of persons, a registered journalism organization:
- will be required to have a board of directors or trustees, each of whom deals at arm’s length with each other;
- must not be factually controlled by a person (or a group of related persons); and
- must generally not, in any given year, receive gifts that represent more than 20 per cent of its total revenues, including donations, from any one source (excluding bequests and one-time gifts made on the initial establishment of the particular registered journalism organization).
To provide transparency, the names of all registered journalism organizations will be listed on the website of the Government of Canada. Registered journalism organizations will be required to file an annual return with the CRA containing information on their activities. In addition, registered journalism organizations will be required to disclose, in their information returns, the name(s) of any donors that make donations of over $5,000 and the amount donated. Similar to registered charities and registered Canadian amateur athletic associations, these information returns will be made public along with certain additional information.
Qualified donees are required to issue official donation receipts in accordance with the Income Tax Act, to maintain proper books and records and to provide access to them upon request by the CRA. As qualified donees, these rules will apply to registered journalism organizations, including the regulatory sanctions for failing to follow these rules (i.e., a monetary penalty, the suspension of its qualified donee status and the revocation of registration).
Where a registered journalism organization no longer meets the requirements for registration as a qualified donee (including because it fails to qualify as a QCJO), the CRA will have the authority to revoke its registration. Where a journalism organization’s registration is revoked, it will no longer be exempt from income tax as a registered journalism organization and will no longer be entitled to issue charitable donation receipts.
Where the CRA proposes to revoke the registration of a registered journalism organization, it will be able to file an objection with the Appeals Branch of the CRA. If the organization disagrees with the decision of the Appeals Branch, it will be entitled to appeal the decision to the Federal Court of Appeal.
This measure will apply as of January 1, 2020.
Refundable Labour Tax Credit
Budget 2019 proposes to introduce a 25-per-cent refundable tax credit on salary or wages paid to eligible newsroom employees of qualifying QCJOs. This will be subject to a cap on labour costs of $55,000 per eligible newsroom employee per year, which will provide a maximum tax credit in respect of eligible labour costs per individual per year of $13,750. To qualify for this credit, a QCJO must be a corporation, partnership or trust primarily engaged in the production of original written news content. A QCJO carrying on a broadcasting undertaking (as defined in the Broadcasting Act) will not qualify for this credit. A QCJO will also not qualify for this credit in a taxation year if it receives funding from the Aid to Publishers component of the Canada Periodical Fund in that taxation year.
A QCJO that is a corporation will be required to meet the following additional requirements in order to qualify:
- if it is a public corporation, it must be listed on a stock exchange in Canada and not be controlled by non-Canadian citizens; and
- if it is a private corporation, it must be at least 75-per-cent owned by Canadian citizens or by public corporations described above.
As noted above, an independent panel will be established to consider eligibility criteria for purposes of this measure. Initially, an eligible newsroom employee will generally be an employee of a QCJO who works for a minimum of 26 hours per week, on average, and is employed by the QCJO (or is expected to be employed) for at least 40 consecutive weeks. In addition, an eligible newsroom employee will be required to spend at least 75 per cent of their time engaged in the production of news content, including by researching, collecting information, verifying facts, photographing, writing, editing, designing and otherwise preparing content. These rules will be amended if necessary, pending the work completed by the independent panel.
Eligible expenses will include salary or wages paid to eligible newsroom employees in respect of a taxation year and will be reduced by the amount of any government or other assistance received by the QCJO in the taxation year. In addition, salary or wages will be eligible expenses of an organization only if they are in respect of a period throughout which it is a QCJO.
A registered journalism organization, which will be exempt from income tax, may also be entitled to this refundable tax credit in respect of its eligible expenses.
This measure will apply to salary or wages earned in respect of a period on or after January 1, 2019. The administrative body will be able to recognize organizations as of that date, in order to ensure the credit is available as intended.
Personal Income Tax Credit for Digital Subscriptions
Budget 2019 proposes a temporary, non-refundable 15-per-cent tax credit on amounts paid by individuals for eligible digital news subscriptions. This will allow individuals to claim up to $500 in costs paid towards eligible digital subscriptions in a taxation year, for a maximum tax credit of $75 annually. In the case of combined digital and newsprint subscriptions, individuals will be limited to claiming the cost of a stand-alone digital subscription.
Eligible digital subscriptions are those that entitle a taxpayer to access content provided in a digital form by a QCJO that is primarily engaged in the production of written content. A subscription with a QCJO carrying on a broadcasting undertaking (as defined in the Broadcasting Act) will not qualify for this credit.
Amounts paid to an organization will be eligible only if, at the time they are paid, the organization is a QCJO. If an organization ceases to qualify as a QCJO, that will not cause amounts paid by individuals for subscriptions prior to the loss of QCJO status to cease to qualify for the credit.
This credit will be available in respect of eligible amounts paid after 2019 and before 2025.
Business Investment in Zero-Emission Vehicles
The capital cost allowance (CCA) system determines the deductions that a business may claim each year for income tax purposes in respect of the capital cost of its depreciable property. With some exceptions, depreciable property is divided into CCA classes and a CCA rate for each class of property is prescribed in the Income Tax Regulations.
Prior to November 21, 2018, the CCA allowed in the first year that a property was available for use was generally limited to half the amount that would otherwise be available. On November 21, 2018, the Government announced a temporary enhanced first-year allowance, referred to as the Accelerated Investment Incentive, equal to up to three times the previously applicable first-year allowance and a temporary 100-per-cent deduction for certain classes.
Motor vehicles are generally included in Class 10, Class 10.1 or Class 16 and are currently subject to the following effective CCA rates.
|Effective First-Year CCA|
November 21, 2018
|Accelerated Investment Incentive|
Budget 2019 proposes to provide a temporary enhanced first-year CCA rate of 100 per cent in respect of eligible zero-emission vehicles. Two new CCA classes will be created: Class 54 for zero-emission vehicles that would otherwise be included in Class 10 or 10.1; and Class 55 for zero-emission vehicles that would otherwise be included in Class 16. In the case of Class 54, there will be a limit of $55,000 (plus sales taxes) on the amount of CCA deductible in respect of each zero-emission passenger vehicle. This new $55,000 limit will be reviewed annually to ensure that it remains appropriate.
To be eligible for this first-year enhanced allowance, a vehicle must:
- be a motor vehicle as defined in the Income Tax Act (i.e., an automotive vehicle for use on streets and highways, but not including a trolley bus or vehicle operated exclusively on rail);
- otherwise be included in Class 10, 10.1 or 16;
- be fully electric, a plug-in hybrid with a battery capacity of at least 15 kWh or fully powered by hydrogen; and
- not have been used, or acquired for use, for any purpose before it is acquired by the taxpayer.
Vehicles in respect of which assistance is paid under the new federal purchase incentive announced in Budget 2019 will be ineligible.
This proposal will also have implications for the Goods and Services Tax/Harmonized Sales Tax (GST/HST). Under the GST/HST, businesses can generally claim input tax credits to recover the GST/HST they pay to acquire inputs for use in their commercial activities. The general policy under the GST/HST is to treat business expenses for passenger vehicles in a manner similar to the treatment under the income tax system.
Accordingly, Budget 2019 proposes to amend the GST/HST to ensure that the treatment of expenses incurred in respect of zero-emission passenger vehicles under the GST/HST parallels the proposed income tax treatment of these vehicles. This will generally result in an increase in the amount of GST/HST that businesses can recover in respect of zero-emission passenger vehicles, subject to limits similar to those under the income tax system.
Application and Phase-Out
This measure will apply to eligible zero-emission vehicles acquired on or after Budget Day and that become available for use before 2028, subject to a phase-out for vehicles that become available for use after 2023 (as shown in Table 3). A taxpayer will be able to claim the enhanced allowance in respect of an eligible zero-emission vehicle only for the taxation year in which the vehicle first becomes available for use.
|March 19, 2019 - 2023||100%|
|2024 - 2025||75%|
|2026 - 2027||55%|
CCA will be deductible on any remaining balances in the new classes on a declining-balance basis at a rate of 30 per cent for Class 54 and 40 per cent for Class 55.
Under the short-taxation-year rule, the amount of CCA that can be claimed in a taxation year must generally be prorated where the taxation year is less than 12 months. This rule will apply to the enhanced allowance for zero-emission vehicles.
As a general rule, the proceeds from the disposition of a depreciable property in a particular CCA class must be deducted from the undepreciated capital cost of property of that class. If at the end of a taxation year the deduction of the proceeds of disposition from the undepreciated capital cost results in a negative balance for the class, this negative amount must generally be included in the taxpayer’s income for the year. Conversely, if at the end of a taxation year a taxpayer has no more property in a class but has a positive balance for the class, this positive amount may generally be deducted from the taxpayer’s income for the year.
A special rule will apply to adjust the proceeds of disposition to be deducted from the undepreciated capital cost of the property on the disposition of a zero-emission vehicle that is subject to the capital cost limit of $55,000. Specifically, the proceeds of disposition will be adjusted based on a factor equal to the capital cost limit of $55,000 as a proportion of the actual cost of the vehicle (see Table 4 for an example).
|First-Year Enhanced Allowance|
|Acquisition cost (before HST)1||$60,000|
|First-Year CCA||$55,000*100% =$55,000|
|Undepreciated capital cost||$55,000-$55,000 =$0|
|Proceeds of disposition||$30,000|
|Part of proceeds of disposition to be deducted from the undepreciated capital cost||$30,000*($55,000/$60,000) =$27,500|
An election will be available to forgo Class 54 or 55 treatment and instead include a zero-emission vehicle in Class 10, 10.1 or 16, as the case may be.
The Income Tax Act and the Income Tax Regulations include a series of rules designed to protect the integrity of the CCA regime and the tax system more broadly (e.g., the leasing property rules). In certain circumstances, these rules can restrict a CCA deduction, or a loss in respect of such a deduction, that would otherwise be available. The integrity rules that currently apply to Classes 10, 10.1 and 16 will apply to Classes 54 and 55.
This proposal is expected to have positive environmental effects, as it is expected to encourage the adoption of technologies that will reduce greenhouse gas (GHG) emissions. A reduction in GHG emissions would contribute to the Federal Sustainable Development Strategy target of reducing Canada’s total GHG emissions by 30 per cent, relative to 2005 emissions levels, by 2030.
Small Business Deduction – Farming and Fishing
In general terms, income from an active business carried on in Canada by a Canadian-controlled private corporation (CCPC) is eligible for a reduced rate of taxation under the small business deduction rules in the Income Tax Act. As of 2019, these rules allow CCPCs to reduce their federal corporate income tax rate from 15 per cent to 9 per cent on such income, up to $500,000. The Income Tax Act contains various rules that are intended to prevent the inappropriate multiplication of this $500,000 limit.
One such rule, enacted in 2016, has the effect of disqualifying “specified corporate income” of a CCPC from eligibility for the small business deduction. This income includes certain amounts earned by a CCPC from sales to a private corporation in which the CCPC, or certain specified persons, holds a direct or indirect interest. However, certain income of a CCPC’s farming or fishing business that arises from sales to a farming or fishing cooperative corporation is excluded from specified corporate income and, as a result, such income remains eligible for the small business deduction.
To provide greater flexibility to farming and fishing businesses, Budget 2019 proposes to eliminate the requirement that sales be to a farming or fishing cooperative corporation in order to be excluded from specified corporate income. As such, this exclusion will apply to the income of a CCPC from sales of the farming products or fishing catches of its farming or fishing business to any arm’s length purchaser corporation. However, consistent with the existing rules, amounts allocated to a CCPC as patronage payments from a purchaser corporation will not qualify for this exclusion.
This measure will apply to taxation years that begin after March 21, 2016.
Scientific Research and Experimental Development Program
Under the Scientific Research and Experimental Development (SR&ED) tax incentive program, qualifying expenditures are fully deductible in the year they are incurred. In addition, these expenditures are eligible for an investment tax credit. The rate and level of refundability of the credit vary depending on the characteristics of the firm, including its legal status and its size.
- For all corporations other than Canadian-controlled private corporations (CCPCs) and for unincorporated businesses, a 15-per-cent non-refundable tax credit is available on all qualifying SR&ED expenditures.
- For CCPCs, a fully refundable enhanced tax credit at a rate of 35 per cent is available on up to $3 million of qualifying SR&ED expenditures annually. This expenditure limit for a taxation year is gradually phased out based on two factors, which apply on the basis of an associated group.
- The expenditure limit is reduced where taxable income for the previous taxation year is between $500,000 and $800,000.
- The expenditure limit is also reduced where taxable capital employed in Canada for the previous taxation year is between $10 million and $50 million.
- Qualifying expenditures in excess of a CCPC’s expenditure limit are eligible for the 15-per-cent tax credit. Unused SR&ED credits earned at this rate may be partially refundable depending on the CCPC’s taxable income and taxable capital.
Table 5 presents the amount of SR&ED credits on $3 million of SR&ED expenditures at specific levels of taxable capital and taxable income under the current rules. In particular, it illustrates how these credits can be affected by a relatively small change in the amount of taxable income for firms within the phase-out range.
For example, a CCPC that spends $3 million on qualifying SR&ED expenditures in a taxation year, and that has $500,000 of taxable income and $10 million of taxable capital in the previous taxation year, is eligible for the 35-per-cent refundable SR&ED credit on all of its expenditures, resulting in a fully refundable credit of $1.05 million. If the corporation’s taxable income for the previous taxation year were $600,000 instead, the total SR&ED tax credits earned would have been $850,000 (of which $700,000 would have been refundable). For this CCPC, a $100,000 increase in taxable income would have resulted in a $200,000 reduction in SR&ED tax credits.
|Prior-Year Taxable Capital||Prior-Year Taxable Income|
Budget 2019 proposes to repeal the use of taxable income as a factor in determining a CCPC’s annual expenditure limit for the purpose of the enhanced SR&ED tax credit. As a result, small CCPCs with taxable capital of up to $10 million will benefit from unreduced access to the enhanced refundable SR&ED credit regardless of their taxable income. As a CCPC’s taxable capital begins to exceed $10 million, this access will gradually be reduced as shown in the highlighted column in Table 5.
This change will provide a more predictable phase-out of the enhanced SR&ED credit rate, which will more effectively support growing small and medium-sized firms as they scale up.
This measure will apply to taxation years that end on or after Budget Day.
Canadian-Belgian Co-productions – Canadian Film or Video Production Tax Credit
The Canadian film or video production tax credit provides a 25-per-cent refundable tax credit to qualified corporations in respect of qualified labour expenditures of an eligible Canadian film or video production. The maximum amount of Canadian labour costs qualifying for the credit is 60 per cent of the total cost of a production, net of any assistance, with the result that the credit can cover up to 15 per cent of total production costs.
Audiovisual co-production treaties and similar instruments allow productions that are the joint projects of producers from two different countries to qualify in both countries as a treaty co-production, for purposes including the Canadian film or video production tax credit. On March 12, 2018, the Government of Canada and the Belgian linguistic communities signed The Memorandum of Understanding between the Government of Canada and the Respective Governments of the Flemish, French and German-speaking Communities of the Kingdom of Belgium concerning Audiovisual Coproduction, modernizing the 1984 film treaty between Canada and Belgium.
Budget 2019 proposes to add this Memorandum of Understanding to the list of instruments under which a film or video production may be produced in order to qualify as a treaty co-production. This measure will allow joint projects of producers from Canada and Belgium to qualify for the Canadian film or video production tax credit.
This measure will apply as of March 12, 2018.
Character Conversion Transactions
In the past, certain taxpayers entered into financial arrangements (character conversion transactions) that sought to reduce tax by converting, with the use of derivative contracts, the returns on an investment that would have the character of ordinary income to capital gains, only 50 per cent of which are included in income.
One type of character conversion transaction involved a taxpayer seeking to gain economic exposure to a portfolio of investments that produces fully taxable ordinary income. The taxpayer would enter into an agreement with a counterparty to acquire Canadian securities at a specified future date. The value of the Canadian securities to be delivered to the taxpayer on the settlement of the forward purchase agreement was based on the performance of the reference portfolio. On the settlement of the forward purchase agreement, the taxpayer acquired the Canadian securities from the counterparty and then immediately resold them for cash. Because the taxpayer made an election to treat its Canadian securities as capital property, it would take the position that any gain realized from their disposition would result in a capital gain.
In response, rules were introduced in 2013 that treat any gain arising from a “derivative forward agreement” as ordinary income rather than as a capital gain. For the purposes of these rules, a derivative forward agreement is defined to include any agreement to purchase a capital property where:
- the term of the agreement (or series of agreements) exceeds 180 days; and
- the difference between the fair market value of the property delivered on settlement of the agreement and the amount paid for the property is derivative in nature (i.e., it is attributable, in whole or in part, to an underlying interest other than certain excluded interests).
This definition also includes agreements to sell a capital property that meet similar conditions.
One important excluded interest is where the economic return from a purchase or sale agreement is based on the economic performance of the actual property being purchased or sold. This exception is intended to exclude certain commercial transactions (e.g., merger and acquisition transactions) from the scope of the derivative forward agreement rules.
An alternative character conversion transaction has been developed that attempts to misuse this commercial transaction exception as it applies to purchase agreements. Under this alternative transaction:
- A first mutual fund (Investor Fund) enters into a forward purchase agreement with a counterparty pursuant to which it agrees to acquire units of a second mutual fund (Reference Fund) at a specified future date, for a purchase price equal to the value of such units at the date the forward purchase agreement is entered into. Reference Fund holds a portfolio of investments that produces fully taxable ordinary income.
- On settlement of the forward purchase agreement, Investor Fund acquires the units of Reference Fund and treats the cost of those units as being equal to the purchase price under the forward purchase agreement.
- Investor Fund then immediately redeems or sells the units of Reference Fund and realizes a gain, which Investor Fund treats as a capital gain, by virtue of making an election to treat its Canadian securities (such as the Reference Fund units) as capital property.
Investor Fund does not treat the forward purchase agreement as giving rise to a “derivative forward agreement” on the basis that the agreement falls within the commercial transaction exception to the definition because Investor Fund’s economic return under the forward purchase agreement is based on the economic performance of the acquired units of Reference Fund over the term of the agreement.
In the end, the alternative transaction provides Investor Fund with an economic return that is essentially based on the performance of the portfolio of investments held by Reference Fund which, if the portfolio of investments was held directly by Investor Fund, would include fully taxable ordinary income. However, the transaction is structured in such a way that the entire return is taxed as a capital gain.
Although this alternative transaction can be challenged by the Government based on existing rules in the Income Tax Act, these challenges could be both time-consuming and costly. As a result, the Government is proposing a specific legislative measure.
Budget 2019 proposes an amendment that introduces an additional qualification for the commercial transaction exception in the definition “derivative forward agreement” as the exception applies to purchase agreements. In general terms, this amendment will provide that the commercial transaction exception is unavailable if it can reasonably be considered that one of the main purposes of the series of transactions, of which an agreement to purchase a security in the future (or an equivalent agreement) is part, is for a taxpayer to convert into a capital gain an amount paid on the security, by the issuer of the security, during the period that the security is subject to the agreement.
This measure will apply to transactions entered into on or after Budget Day. It will also apply after December 2019 to transactions that were entered into before Budget Day including those that extended or renewed the terms of the agreement on or after Budget Day. This grandfathering will incorporate the same growth limits used under the transitional relief provided under the derivative forward agreement rules introduced in 2013 to ensure that no new money flows into grandfathered transactions on or after Budget Day.
International Tax Measures
Transfer Pricing Measures
In the tax context, “transfer pricing” refers to the prices, and other terms and conditions, used in transactions occurring across international borders by persons who are not dealing at arm’s length. These transactions may involve the intra-group purchase or sale of goods, services or intangibles. They may also involve the provision of intra-group financing or loan guarantees. Because these transactions occur across international borders, it is necessary to address the tax issues related to transfer pricing in a broad international context. Member countries of the Organisation for Economic Co-operation and Development, including Canada, have agreed to adopt a standard against which a multinational enterprise’s transfer pricing is measured, referred to as the “arm’s length principle”. The application of this principle protects the tax base against the shifting of income that can potentially result from the discretionary determination of transfer prices by a multinational enterprise.
In Canada, the arm’s length principle is reflected in the transfer pricing rules contained in Part XVI.1 of the Income Tax Act. Under the transfer pricing rules, where the terms or conditions of a transaction, or series of transactions, between non-arm’s length parties do not reflect arm’s length terms and conditions, the Canada Revenue Agency may adjust, for the purpose of computing the parties’ tax liabilities under the Income Tax Act,the quantum or nature of amounts related to the transaction or series between the participants to reflect arm’s length terms and conditions.
Budget 2019 proposes two measures concerning the relationship between the transfer pricing rules in Part XVI.1 and other provisions of the Income Tax Act.
Order of Application of the Transfer Pricing Rules
As noted, the transfer pricing rules can apply to determine the quantum or nature of amounts relevant to the computation of tax. Other provisions of the Income Tax Act can apply to similar effect. Where both the transfer pricing rules and another provision of the Income Tax Act may apply to the same amount that is relevant to the computation of tax, questions have arisen as to whether adjustments, if any, under the transfer pricing rules are made in priority to the application of the other provision. This may have various implications, including with respect to the calculation of penalties imposed under Part XVI.1.
To provide greater certainty in the application of the income tax rules, Budget 2019 proposes to amend the Income Tax Act to clarify that the transfer pricing rules in Part XVI.1 apply in priority to the application of the provisions in other parts of the Income Tax Act, including the provisions relating to income computation in Part I. The current exceptions to the application of the transfer pricing rules that pertain to situations in which a Canadian resident corporation has an amount owing from, or extends a guarantee in respect of an amount owing by, a controlled foreign affiliate will continue to apply.
This measure will apply to taxation years that begin on or after Budget Day.
Applicable Reassessment Period
The transfer pricing rules include an expanded definition of “transaction”, which includes an arrangement or event. This allows the transfer pricing rules to apply to the broad range of situations that may arise in the context of a multinational enterprise’s operations.
After a taxpayer files an income tax return for a taxation year, the Canada Revenue Agency is required to perform an initial examination of the return and to assess tax payable, if any, with all due dispatch. The Canada Revenue Agency then normally has a fixed period, generally three or four years, after its initial examination beyond which the Canada Revenue Agency is precluded from reassessing the taxpayer.
An extended three-year reassessment period exists in respect of a reassessment made as a consequence of a transaction involving a taxpayer and a non-resident with whom the taxpayer does not deal at arm’s length. This is intended to apply in the transfer pricing context. However, the expanded definition of “transaction” used in the transfer pricing rules does not apply for the purposes of the rule establishing this extended reassessment period.
Budget 2019 proposes to amend the Income Tax Act to provide that the definition “transaction” used in the transfer pricing rules also be used for the purposes of the extended reassessment period relating to transactions involving a taxpayer and a non-resident with whom the taxpayer does not deal at arm’s length.
This measure will apply to taxation years for which the normal reassessment period ends on or after Budget Day.
Foreign Affiliate Dumping
The foreign affiliate dumping rules in the Income Tax Act are intended to counter erosion of the tax base resulting from transactions in which a corporation resident in Canada (CRIC) that is controlled by a non-resident buys or otherwise invests in a foreign affiliate using borrowed, or surplus funds. One example of a foreign affiliate dumping transaction involves a CRIC using retained earnings to acquire shares of a foreign affiliate from its foreign parent corporation. Absent the foreign affiliate dumping rules, this transaction would provide a mechanism for the foreign parent corporation to, in effect, extract surplus from the CRIC free of dividend withholding tax.
In general terms, and subject to certain exceptions, the foreign affiliate dumping rules currently apply where a CRIC makes an “investment” (as defined in the rules) in a foreign affiliate of the CRIC and the CRIC is controlled by a non-resident corporation. The rules can also apply where a CRIC makes an investment in a foreign affiliate of a corporation that does not deal at arm’s length with the CRIC, if the CRIC or the non-arm’s length corporation is controlled by a non-resident corporation. When they apply, the foreign affiliate dumping rules generally result in:
- a suppression of paid-up capital otherwise created because of the investment or a reduction in the paid-up capital of one or more relevant classes of shares of the CRIC (or, in certain cases, a related corporation resident in Canada); and
- a deemed dividend paid by the CRIC to the controlling non-resident (or, where a valid election is made, by another qualifying corporation resident in Canada or to a different non-resident corporation). The amount of the deemed dividend is equal to the amount by which the investment exceeds the amount of the paid-up capital suppressed or reduced. This deemed dividend is subject to non-resident withholding tax, which may be reduced by an applicable tax treaty.
While the foreign affiliate dumping rules currently apply only in respect of CRICs that are controlled by a non-resident corporation (or by a related group of non-resident corporations), similar policy concerns arise where a CRIC that is controlled by a non-resident individual or trust makes an investment in a foreign affiliate.
To better achieve the policy objectives of the foreign affiliate dumping rules, Budget 2019 proposes to extend the application of these rules to CRICs that are controlled by
- a non-resident individual,
- a non-resident trust, or
- a group of persons that do not deal with each other at arm’s length, comprising any combination of non-resident corporations, non-resident individuals and non-resident trusts.
Related persons are considered not to deal with each other at arm’s length for income tax purposes. To ensure that a non-resident trust will be considered to be related to another non-resident person in circumstances similar to where a non-resident corporation would be so related, the proposals include an extended meaning of “related” that applies for the purpose of determining whether a non-resident trust does not deal at arm’s length with another non-resident person.
This measure will apply to transactions and events that occur on or after Budget Day.
Cross-Border Share Lending Arrangements
Securities lending is a long-established practice that plays an important role in capital markets. Certain securities lending arrangements involve a non-resident lending a share to a Canadian resident, and the Canadian resident agreeing to return an identical share to the non-resident in the future. The Canadian resident typically provides collateral as security for the return of the identical share. Over the term of the arrangement, the Canadian resident is obligated to make payments as compensation for any dividends paid by the issuer of the lent share (dividend compensation payments). Ultimately, the non-resident retains the same economic exposure with respect to the lent share as if it had continued to hold the share.
The Income Tax Act contains rules that generally seek to put a lender under a securities lending arrangement in the same tax position as if the securities had not been lent. Within the securities lending arrangement rules, there are special rules that determine the character of any dividend compensation payment made by a Canadian resident to a non-resident under such securities lending arrangements for the purposes of the non-resident withholding tax rules in Part XIII of the Income Tax Act.
These characterization rules deem a dividend compensation payment made under a “fully collateralized” securities lending arrangement to be a payment made by the Canadian resident to the non-resident of a dividend payable on the lent share. This deemed dividend is subject to Canadian dividend withholding tax. For the purpose of these rules, a securities lending arrangement is “fully collateralized” if the Canadian resident provides collateral to the non-resident in the form of money or government debt obligations with a value of 95 per cent or more of the lent share. This collateral must be in place throughout the term of the securities lending arrangement, and the Canadian resident must be entitled to the benefits of all or substantially all the income from, and opportunity for gain with respect to, the collateral.
If a securities lending arrangement is not “fully collateralized”, the dividend compensation payment is instead deemed to be a payment of interest made by the Canadian resident to the non-resident. Since 2008, interest paid to a non-resident with whom a Canadian resident is dealing at arm’s length is generally exempt from Canadian withholding tax, unless the interest is participating debt interest.
Certain non-residents have engaged in planning intended to avoid Canadian dividend withholding tax on dividend compensation payments made to them in respect of shares of Canadian resident corporations (Canadian shares). Broadly speaking, this planning is effected using two different methods.
The first method involves entering into securities lending arrangements that are structured to not meet the “fully collateralized” test in the Income Tax Act, but that are, in substance, fully collateralized. When a securities lending arrangement is not “fully collateralized”, the characterization rules apply to deem a dividend compensation payment to be a payment of interest. In these circumstances, these non-residents take the position that the general withholding tax exemption on interest payments applies to this deemed interest payment.
The second method involves entering into securities loans that are designed to fail the requirements of the “securities lending arrangement” definition in the Income Tax Act. If a securities loan does not meet that definition, the characterization rules do not apply. As a result, these non-residents take the position that a dividend compensation payment made under such a securities loan is simply a payment made under a derivative contract and is not subject to Canadian withholding tax.
Depending on the particular facts, these arrangements can be challenged by the Government based on existing rules in the Income Tax Act. However, as any such challenge could be both time-consuming and costly, the Government is proposing specific legislative measures to ensure that the appropriate tax consequences apply to these arrangements.
To better reflect the policy objective that the Canadian dividend withholding tax consequences for a non-resident lender under a share loan should generally be the same as if it had continued to hold the lent share, Budget 2019 proposes an amendment to ensure that a dividend compensation payment made under a securities lending arrangement by a Canadian resident to a non-resident in respect of a Canadian share is always treated as a dividend under the characterization rules and, accordingly, always subject to Canadian dividend withholding tax.
Budget 2019 also proposes an amendment to apply the characterization rules not only to a “securities lending arrangement”, as defined under the Income Tax Act, but also to a “specified securities lending arrangement”. Budget 2018 introduced the latter definition in the context of a measure intended to prevent taxpayers from realizing artificial losses through the use of equity-based financial arrangements. The definition includes securities loans that are substantially similar to securities lending arrangements.
Finally, Budget 2019 proposes to introduce complementary amendments to ensure that the securities lending arrangement rules cannot be used to obtain other unintended withholding tax benefits. For instance, a rule will be introduced to ensure that the same withholding tax rate under a tax treaty applies to a dividend compensation payment made to a non-resident as to a dividend that would have been paid to that non-resident had it continued to hold the lent Canadian share.
These proposed amendments will apply to compensation payments that are made on or after Budget Day unless the securities loan was in place before Budget Day, in which case the amendments will apply to compensation payments that are made after September 2019.
The existing characterization rules may also inappropriately subject dividend compensation payments in respect of lent shares issued by non-resident corporations (foreign shares) to Canadian dividend withholding tax. In particular, if a non-resident lends a foreign share to a Canadian resident under a securities lending arrangement that is “fully collateralized”, the characterization rules deem a dividend compensation payment in respect of the foreign share to be a dividend paid by the Canadian resident, rather than by the non-resident issuer of the share, to the non-resident. Canadian dividend withholding tax would therefore apply on the dividend compensation payment. If the non-resident had continued to hold the lent foreign share, it would not have been subject to Canadian dividend withholding tax on a dividend paid by the non-resident issuer of the share.
To address this issue, Budget 2019 proposes an amendment to broaden an existing exemption from Canadian dividend withholding tax so that it includes any dividend compensation payment made by a Canadian resident to a non-resident under a securities lending arrangement if:
- the securities lending arrangement is “fully collateralized”; and
- the lent security is a foreign share.
This proposed amendment will apply to dividend compensation payments that are made on or after Budget Day.
Sales and Excise Tax Measures
GST/HST Health Measures
Under the Goods and Services Tax/Harmonized Sales Tax (GST/HST), tax relief is provided for basic health care services and products. This is achieved by exempting the services of basic health care professionals, such as doctors, dentists and physiotherapists, and zero-rating prescription drugs, certain biologicals and certain specially designed medical devices.
Exempt treatment means that suppliers of exempt health care services do not charge the GST/HST, but they cannot claim input tax credits to recover the GST/HST paid on inputs in relation to these supplies. Zero-rating means that suppliers do not charge purchasers the GST/HST on these supplies and are entitled to claim input tax credits to recover the GST/HST paid on inputs in relation to these supplies. The health care services and medical items eligible for GST/HST relief are listed in the GST/HST legislation.
Budget 2019 proposes to extend the application of the GST/HST relief to certain biologicals, medical devices and health care services to reflect the evolving nature of the health care sector.
Human Ova and In Vitro Embryos
Canadians experiencing infertility, as well as single individuals and same-sex couples, are increasingly turning to assisted human reproduction to help build their families. Donated human sperm, ova or in vitro embryos may be used as part of an assisted human reproduction procedure. At present, human sperm is zero-rated in the GST/HST legislation, while human ova and in vitro embryos are not.
Technological advances have resulted in donated human ova and in vitro embryos now being used in assisted human reproduction procedures and the Assisted Human Reproduction Act has established a framework for assisted human reproduction in Canada. Under this framework, donated human sperm or ova may be legally imported or purchased in Canada from a reproduction clinic or donor bank, so long as these facilities are not acting on behalf of a donor. In addition, donated human in vitro embryos may be legally imported into Canada.
To reflect developments in the health care sector related to assisted human reproduction, Budget 2019 proposes to provide GST/HST relief for human ova and in vitro embryos, similar to the relief provided for human sperm. In line with the legal framework for assisted human reproduction, it is proposed that supplies and imports of human ova be relieved of the GST/HST, and that imports of human in vitro embryos also be relieved of the GST/HST.
This measure will apply to supplies and imports of human ova made after Budget Day, and to imports of human in vitro embryos made after Budget Day.
The Government is also committed to ensuring that the medical expense tax credit reflects medically related developments. To this end, the Government will be reviewing the tax treatment of fertility-related medical expenses under the medical expense tax credit (for the purposes of the Income Tax Act)for fairness and consistency, and in light of work being undertaken by Health Canada in relation to the Assisted Human Reproduction Act and supporting regulations.
Foot Care Devices Supplied on the Order of a Podiatrist or Chiropodist
Medical and assistive devices that are designed to assist an individual with a disability or impairment are zero-rated under the GST/HST. Certain medical and assistive devices are eligible for this relief only when supplied on the written order of a physician, nurse, physiotherapist or occupational therapist. The list of medical and assistive devices that are zero-rated only when supplied on the written order of these practitioners includes certain foot care devices, such as orthopedic devices and anti-embolic stockings.
Podiatrists and chiropodists are regulated health professionals in most provinces, and are often the only practitioner seen by an individual for treatment of a foot problem or disorder. The health care services of podiatrists and chiropodists are also exempt from the GST/HST. However, they are not among the list of practitioners on whose order certain medical devices can be sold on a zero-rated basis.
In recognition of their role in the health care system, Budget 2019 proposes to add licenced podiatrists and chiropodists to the list of practitioners on whose order supplies of foot care devices are zero-rated.
This measure will apply to supplies of these items made after Budget Day.
Multidisciplinary Health Care Services
Certain health care services may be provided by a multidisciplinary team of licensed health care professionals. For example, an assessment and rehabilitation program can be rendered jointly by a team consisting of a physician, an occupational therapist, and a physiotherapist.
When supplied separately, the services rendered by these health care professionals would generally be exempt from GST/HST. However, there is currently no provision under the GST/HST that explicitly relieves the service of a multidisciplinary health care team that combines elements of the various practices.
Budget 2019 proposes to exempt from the GST/HST the supply of these multidisciplinary health services. The relief will apply to a service rendered by a team of health professionals, such as doctors, physiotherapists and occupational therapists, whose services are GST/HST-exempt when supplied separately. The exemption will apply provided that all or substantially all – generally 90 per cent or more – of the service is rendered by such health professionals acting within the scope of their profession.
This measure will apply to supplies of multidisciplinary health services made after Budget Day.
New Classes of Cannabis Products
On October 17, 2018, the sale of cannabis for non-medical purposes became legal in Canada under the Cannabis Act. There are currently five classes of cannabis products permitted for legal sale: fresh cannabis, dried cannabis, cannabis oil, cannabis plant seeds and cannabis plants.
The Government released for consultation in December 2018 draft regulations governing the production and sale of additional classes of cannabis products, namely edible cannabis, cannabis extracts and cannabis topicals. Following the upcoming legalization and regulation of these three new classes of cannabis products, it is expected that there will eventually be seven classes in total, since cannabis oils are proposed to be subsumed under the new ‘cannabis extract’ product class after a six-month transition period.
Currently, all cannabis products (including cannabis oils) are generally subject to an excise duty under the Excise Act, 2001 that is the higher of a flat rate applied on the quantity of cannabis contained in a final product and a percentage of the dutiable amount of the product as sold by the producer (ad valorem rate). Budget 2019 proposes an approach to more effectively apply the duty to these new classes of cannabis products, as well as to cannabis oils.
Budget 2019 proposes that edible cannabis, cannabis extracts (including cannabis oils) and cannabis topicals be subject to excise duties imposed on cannabis licensees at a flat rate applied on the quantity of total tetrahydrocannabinol (THC), the primary psychoactive compound in cannabis, contained in a final product. The THC-based duty will be imposed at the time of packaging of a product and become payable when it is delivered to a non-cannabis licensee (e.g., a provincial wholesaler, retailer or individual consumer).
The proposed THC-based rate would alleviate compliance issues that producers have encountered with respect to the tracking of the quantity of cannabis material contained in cannabis oils, and would allow producers and administrators to more easily calculate and verify excise duties for cannabis edibles, extracts and topicals. This will be facilitated by requirements in the labelling regulations under the Cannabis Act that mandate the display of total THC content on cannabis products packaging.
The current excise duty regime and associated rates for fresh and dried cannabis, and seeds and seedlings, will be unaffected by this proposed change. Current exemptions under the excise duty framework will also continue to apply in respect of fresh and dried cannabis and cannabis oils that contain no more than 0.3 per cent THC, as well as for pharmaceutical cannabis products that have a Drug Identification Number and can only be acquired through a prescription.
The federal government has entered into Coordinated Cannabis Taxation Agreements (CCTAs) with most provincial and territorial governments, with the aim of keeping duties on cannabis low through a federally administrated coordinated framework. The agreement provides that 75 per cent of the duties go to provincial and territorial governments and the remaining 25 per cent to the federal government. For the first two years of the agreement, the federal portion of cannabis excise duty revenue is capped at $100 million annually, with any federal revenue in excess of $100 million provided to provinces and territories. The proposed measure will not affect the CCTAs.
- The combined federal-provincial-territorial THC-based excise duty rate for cannabis edibles, cannabis extracts (including cannabis oils) and cannabis topicals is proposed to be $0.01 per milligram of total THC.
- The new proposed rate is not expected to materially change the overall projected excise duty revenues from these products under the combined federal-provincial-territorial $1 per gram rate presented in Budget 2018.
- Consistent with the CCTAs signed with provinces and territories, the new THC-based regime will provide for the application of a federal THC-based rate, as well as an additional THC-based rate in respect of provinces and territories, which results in the agreed-upon 75:25 revenue split. These respective rates are set out for each province and territory in Table 6.
- Where provinces and territories have requested a sales tax adjustment under the CCTAs to account for differences in general sales tax rates across the country, the adjustment will continue to be computed as an ad valorem additional duty.
($/mg of total THC)
|Additional Rate in Respect of Province/Territory
($/mg of total THC)
|Current Ad Valorem Sales Tax Adjustment
|Newfoundland and Labrador||0.0025||0.0075||-|
|Prince Edward Island||0.0025||0.0075||-|
The proposed changes to the excise duty framework will come into effect on May 1, 2019.
- As a practical matter, the changes will initially apply to cannabis oil products packaged by licensed producers.
- Any cannabis oil product that is packaged for final retail sale before May 1, 2019 will be subject to the currently applicable excise duty rate, regardless of the date of its final delivery to a purchaser.
- As cannabis edibles, other cannabis extracts and cannabis topicals become legally permitted for production and sale under the Cannabis Act, licensed producers will be subject to the new THC-based excise duty rules as they relate to these products.
Previously Announced Measures
Budget 2019 confirms the Government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:
- Income tax measures announced on November 21, 2018 in the Fall Economic Statement to
- provide for the Accelerated Investment Incentive,
- allow the full cost of machinery and equipment used in the manufacturing and processing of goods, and the full cost of specified clean energy equipment, to be written off immediately,
- extend the 15-per-cent mineral exploration tax credit for an additional five years, and
- ensure that business income of communal organizations retains its character when it is allocated to members of the communal organization for tax purposes;
- Regulatory proposals released on September 17, 2018 relating to the taxation of cannabis;
- Remaining legislative and regulatory proposals released on July 27, 2018 relating to the Goods and Services Tax/Harmonized Sales Tax;
- The measures referenced in Budget 2018 to support employees who must reimburse a salary overpayment to their employers due to a system, administrative or clerical error;
- The income tax measures announced in Budget 2018 to implement enhanced reporting requirements for certain trusts to provide additional information on an annual basis;
- The income tax measure announced in Budget 2018 to facilitate the conversion of Health and Welfare Trusts to Employee Life and Health Trusts;
- Measures confirmed in Budget 2016 relating to the Goods and Services Tax/Harmonized Sales Tax joint venture election;
- The income tax measures announced in Budget 2016 expanding tax support for electric vehicle charging stations and electrical energy storage equipment; and
- The income tax measures announced in Budget 2016 on information-reporting requirements for certain dispositions of an interest in a life insurance policy.
Budget 2019 also reaffirms the Government’s commitment to move forward as required with technical amendments to improve the certainty of the tax system.
- Date modified: