Federal Finance Minister Jim Flaherty delivered the federal government's Budget 2014 on February 11. Budget 2014 forecasts a deficit of $16.6 billion for fiscal 2014 and of $2.9 billion for 2015, and a surplus of $6.4 billion for 2016.
Budget 2014 contains a potpourri of tax measures based on the government's focus on tax fairness and transparency. Below we have summarized the principal tax measures that would be of most interest to Bull Housser's clients and interested parties.
I. PERSONAL TAX
1. Estates and Trusts
Generally, most inter vivos trusts are taxed on all of their income at the top marginal tax rate for individuals, whereas estates and testamentary trusts (and certain "grandfathered" inter vivos trusts) are taxed at the graduated marginal tax rates available to individuals. Following up on a proposal in Budget 2013, and starting in 2016, estates and testamentary and grandfathered trusts will be taxed on all of their income at the top marginal tax rate, except that the graduated tax rates will apply to an estate for its first 36 months.
2. Immigrant Trusts
Currently, immigrants to Canada may contribute assets to non-resident trusts and the non-Canadian income earned in such trusts would not be taxable in Canada for up to 60 months after the immigrant became a resident of Canada. Budget 2014 proposes to eliminate this exemption for trusts' taxation years that, generally, end after 2014.
3. Mineral Exploration Tax Credit
The mineral exploration tax credit is again extended and will now be available to purchasers of flow-through shares on or before March 31, 2015.
4. Split Income
The "split income" rules are designed to discourage income splitting between parents and their minor children through the use of trusts or partnerships. This is achieved by taxing split income at the highest marginal tax rate. The definition of split income is being expanded effective this year to include income derived from a business or a rental property where a person related to the minor is involved in the trust or partnership.
5. Farming and Fishing
There now exist rules which permit an intergenerational rollover and access to the lifetime capital gains exemption in connection with assets used principally in a farming business or in a fishing business. Similar rules apply to shares of corporations and interests in partnerships, the assets of which are used in one or the other of those businesses. These rules will be extended to cases where the assets are used in a combination of farming and fishing.
II. INTERNATIONAL TAX
1. Thin Capitalization
The thin capitalization rules deny the deduction of interest expense by a Canadian company in respect of debt, in excess of 1.5 times the company's equity, owing by the company to persons who, together with their non-arm's length persons, own 25% or more of the votes or value of the company. One method of trying to avoid these rules has been to structure a back-to-back loan which interposes a foreign arm's-length bank between the Canadian company and the ultimate lender. Budget 2014 proposes to shut down this planning by expanding the anti-avoidance rules in the thin capitalization rules and by adding a withholding tax on interest paid to foreign banks in this situation.
2. International Tax Planning – Base Erosion and Profit Shifting (BEPS)
International tax planning carried on by multi-national corporate groups is often focussed on base erosion – the minimization of income in high-tax jurisdictions – and profit shifting – the moving of profits to low- or no-tax jurisdictions. That is, "BEPS". Following on the OECD's BEPS initiative, Canada intends to establish a BEPS action plan, and Budget 2014 solicits comments from stakeholders on a broad range of questions relevant to the structuring of that action plan.
3. Treaty Shopping
Following on a Department of Finance consultation paper, Budget 2014 proposes rules, to be included in the Income Tax Convention Interpretation Act (i.e. not in Canada's tax treaties), designed to discourage treaty shopping.
III. CHARITIES AND NON-PROFIT ORGANIZATIONS
1. Donations By An Estate
Donations made to qualified donees (such as charities and RCAAAs) are typically eligible for a charitable donation tax credit. Currently, where a donation is made by will, this donation is considered to have been made by that individual immediately before he or she passed away. Where a donation is made by the estate (i.e. not by the terms of the will), the donation credit may only be claimed against the estate's income.
Budget 2014 proposes to eliminate this distinction by causing all donations by will to be considered made by the estate at the time at which the property is transferred to a qualified donee. In addition, for all gifts made by the estate within the first 36 months following the individual's death, the trustee will have the discretion to claim the donation in the year the donation is made, in an earlier year of the estate, or in the last two tax years of the individual.
2. Consultation on NPO Status
A non-profit organization (an "NPO") is a club, society or association that is organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit.
Budget 2014 indicates that concerns have been raised about certain organizations claiming this status earning profits that are not incidental to their non-profit purposes, making income available for the personal benefit of members or maintaining large cash reserves. Budget 2014 states that a review will be carried out to determine whether the NPO exemption is properly targeted and whether there are sufficient transparency and accountability provisions with respect to this exemption.
3. Donations of Ecologically Sensitive Land
For such gifts made on or after today's date, the carry-forward period for claiming a donation credit for individuals (or a charitable donation deduction for corporations) in respect of ecologically sensitive land is extended to ten years (from five).
4. Donations of Certified Cultural Property
Where a taxpayer donates property that is part of a tax shelter gifting arrangement or that is held for a short period of time, the value of the gift is deemed to be no greater than its cost to the donor. Gifts of certified cultural property are currently not subject to this rule.
For gifts of such property after today's date, Budget 2014 will extend the rule above to include certified cultural property.
IV. BUSINESSES
1. Eligible Capital Property ("ECP") Consultations
Certain types of property, such as goodwill or licenses of an infinite duration, do not currently fit in any of the capital cost allowance ("CCA") classes in the Income Tax Act. These types of property are ECPs. Currently, on purchase of an ECP, 75% of the eligible capital expenditure ("ECE") is included in a cumulative eligible capital ("CEC") pool, from which an entity may take 7% per year as a deduction (subject to certain limitations).
Budget 2014 announces a consultation on the change of this regime toward the creation of a new CCA class for ECPs. Under this proposal, 100% of the cost amount of the property would be included in the class, from which 5% could be depreciated yearly. The current CCA rules would apply to this new class.
Budget 2014 also includes special rules for goodwill, as well as transitional rules for previously incurred ECEs.
2. Accelerated CCA for Clean Energy Generation Equipment
Class 43.2 provides accelerated CCA (50% per year on a declining balance basis) for purchases of certain clean energy generation and energy conservation equipment. Budget 2014 proposes to add water current energy equipment (equipment used primarily for the purpose of generating electricity from water-flow) to this class and to expand the scope of already-included gasification equipment.
3. Employer Source Deduction Remittances
Employers are required to remit source deductions for employees' income tax, CPP contributions and EI premiums. The frequency of remittance of these deductions depends on the employer's total average monthly withholding amount in preceding calendar years.
Budget 2014 proposes to reduce the frequency of remittance of source deductions for certain employers for amounts withheld after 2014 in the following manner:
- by raising the threshold at which an employer would be required to withhold twice a month from $15,000 in average monthly withholdings to $25,000; and
- by raising the threshold at which an employer would be required to withhold up to four times a month from $50,000 in average monthly withholdings to $100,000.
4. Government Funding
Budget 2014 also proposes almost $1.7 billion of research and innovation funding, as well as over $95 million of new funding for various internship and mentor programs.
V. GST MEASURES
1. Joint Venture Elections
The Department of Finance states that it will be coming out with proposals to make the GST accounting obligations of joint venture participants simpler. Joint venturers are and will be able to make an election to have the party that is the operator or manager of a joint venture account for all of the GST of a joint venture.
This announcement coincides with CRA comments that reiterate that bare trustees or nominee companies cannot elect to be the operators of a joint venture, but that CRA auditors have been instructed to not assess additional GST or penalties when bare trustees have been named as operator of a joint venture but otherwise have complied with filing and collection obligations in all other ways.
2. Health-Related Goods and Services
The GST exemption for certain health care related goods and services is expanded as follows:
- LI>acupuncturists and naturopathic services are exempted;
- eyewear (other than glasses/contacts) designed to electronically treat a defect of vision is exempted if prescribed by a doctor or optometrist; and
- the exemption for services that are training to assist individuals with a disorder or disability will be expanded to exempt the designing of the training itself where a government pays in whole or part for the design service and the design service is certified by a doctor or like professional in a client relationship with the end user.
3. Failing to Register for GST
The CRA will now have the authority to itself register persons for GST where they fail to comply with an order to do so.
VI. ABORIGINAL TAX MEASURES
1. Aboriginal Tax Policy
The federal government reaffirms its willingness to negotiate and implement arrangements by which aboriginal governments directly tax (i.e. charge income tax) persons subject to their authority.
In addition, the federal government will also facilitate similar arrangements between provinces and territories and aboriginal governments.
Finally, Budget 2014 proposes two interesting non-tax measures.
1. Canada's Intellectual Property Regime
The government proposes to modernize and strengthen Canada's intellectual property framework by ratifying or acceding to the Madrid Protocol, the Singapore Treaty, the Nice Agreement, the Patent Law Treaty and the Hague Agreement.
2. Immigrant Investor Program
Budget 2014 proposes to replace the Immigrant Investor Program with an Immigrant Investor Capital Fund pilot project. The government is concerned that the Immigration Investor Program does not contribute job creation or economic growth as it is intended to have done. Instead, the government will introduce an Immigrant Investor Venture Capital Fund pilot project which will require immigrants to make a significant investment in the Canadian economy.
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