Legal Alert: Economic Action Plan 2014 – The Road to Balance: Creating Jobs and Opportunities
February 11, 2014
By Jeffrey Blucher, at McInnes Cooper
On February 11, 2014 the Federal Minister of Finance, James M. Flaherty, tabled The Economic Action Plan 2014 – The Road to Balance: Creating Jobs and Opportunities. The Plan builds on the series of Economic Action Plans the Minister has tabled since the economic crisis began in 2008. The focus of the 2014 Economic Action Plan is to continue to implement the Government’s plan for jobs and growth by:
- Connecting Canadians with available jobs by helping them to acquire the skills that will get them hired or help them get better jobs;
- Fostering job creation, innovation and trade by keeping taxes low; reducing the tax compliance burden; and continuing to provide Canadian businesses and investors with the market access they need to succeed in the global economy;
- Developing resources responsibly, conserving Canada’s natural heritage and investing in infrastructure and transportation by supporting the mining, forestry and agriculture sectors; investing in national parks and conservation initiatives; expanding tax support for clean energy; and making strategic investments in public infrastructure and transportation services; and
- Supporting families and communities by taking additional steps to protect Canadian consumers; keeping taxes low for families; and improving the safety of Canadians.
The Minister has once again announced numerous changes to the Canadian tax system, some of which are targeted to relieving measures and some of which are tax fairness measures designed to close perceived tax “loopholes”. Of these, perhaps the most important are the proposed implementation of the rules applicable to testamentary trusts, estates and grandfathered inter-vivos trusts which will subject them to flat high rate taxation as well as the proposed elimination of the 60 month exemption for immigration trusts.
PLAN TO RETURN TO BUDGET BALANCE AND FISCAL OUTLOOK
The Government remains on target to return to a balanced budget in 2015. The projected deficit for 2013-14 is $16.6 billion, the projected deficit for 2014-15 is $2.9 billion and the projected surplus for 2015-16 is $6.4 billion.
Though the Economic Action Plan was touted as being a low key budget that would not be of much interest to most Canadians, it contains many tax measures that reflect the Government’s ongoing plan to improve the fairness and integrity of the Canadian tax and to ensure that everyone pays their fair share. In that respect, the Minister has proposed a number of tax amendments. Highlights include:
Personal Income Tax Measures
- Adoption Expense Tax Credit. The 15% federal Adoption Expense Tax Credit is increased from $11,774 to $15,000 of eligible expenses in 2014.
- Medical Expense Tax Credit (METC). Amounts paid for the design of an individualized therapy plan for individuals who qualify for the METC will be eligible for the METC if the cost of the therapy qualifies and a number of prescribed conditions are met. In addition, the cost of a service animal, together with the cost of its care and maintenance and the cost of travel incurred by the individual to attend a training facility for the service animal, will be added to the list of METC qualifying expenditures. Both of these METC measures will apply to expenditures incurred after 2013.
- Search and Rescue Volunteers Tax Credit (SRVTC). For 2014 and subsequent taxation years, a new 15% non-refundable tax credit based on an amount of $3,000 will be created for eligible ground, air and marine search and rescue volunteers. Eligible individuals will be required to have performed at least 200 hours of volunteer search and rescue services in a taxation year to qualify for this credit, provided the individual is not also paid by the organization for his or her services. Individuals who volunteer a combined 200 or more hours for search and rescue or as a volunteer firefighter will be eligible to claim either the SRVTC or the Volunteer Firefighters Tax Credit (VFTC). An individual who claims either the VFTC or the SRVTC will not be eligible to claim the existing $1,000 exemption for honoraria paid by a government, municipality or other public authority to emergency services volunteers.
- Extension of the Mineral Exploration Tax Credit for Flow-Through Share Investors. The Mineral Exploration Tax Credit will be extended for one additional year to flow-through share agreements entered into on or before March 31, 2015.
- Farming and Fishing Businesses. Budget 2014 proposes to simplify the tax rules that allow for the rollover of farm property and fishing property on intergenerational transfers from an individual to the individual’s child as well the rules that provide an $800,000 lifetime capital gains exemption on certain farming and fishing property to accommodate taxpayers involved in a combination of fishing and farming. This measure will apply to dispositions and transfers that occur in the 2014 and subsequent taxation year.
- Tax Deferral for Farmers. The tax deferral for farmers that currently applies to the disposition of breeding livestock (currently cattle, goats, sheep and some horses) due to drought, flood or excess moisture conditions in prescribed regions is extended to bees and all types of horses for the 2014 and subsequent taxation years.
- Amateur Athlete Trusts. Budget 2014 proposes to allow income contributed to an amateur athlete trust after 2013 to qualify as earned income for the purpose of determining the RRSP contribution limit of the trust’s beneficiary. As the eligible income contributed to the amateur athlete trust is exempt from tax in the year contributed, it essentially creates a degree of double deduction for tax purposes. In addition to applying to contributions made after 2013, eligible individuals are also able to elect on or before March 2, 2015 to have this provision apply to contributions made in 2011, 2012 and 2013.
- Pension Transfer Limits. Rules under the Income Tax Act determine the amount that can be transferred on a tax free basis from a defined benefit RPP to an RRSP. In 2011, special rules were introduced to deal with RPP plan underfunding so that excess amounts transferred would not be included in income in prescribed circumstances. Budget 2014 proposes to expand these special rules in prescribed circumstances, retroactive to transfers made after 2012.
- GST/HST Credit Administration. Budget 2014 proposes to eliminate the need for an individual to apply (currently done by checking a box on the individual’s T1 tax return) for the GST/HST Credit for 2014 and subsequent taxation years, and to allow the CRA to automatically determine if the individual is eligible to receive the GST/HST Credit. For eligible couples, the GST/HST Credit will be paid to the spouse (or common-law partner) whose tax return is assessed first.
- Graduated Rate Taxation of Trusts and Estates. In Budget 2013, the Minister announced the government’s intention to review and consult on measures targeted toward the taxation of grandfathered inter vivos trusts, testamentary trusts and estates. A consultation paper was released on June 3, 2013, with submissions due on December 2, 2103. Budget 2014 proposes to essentially implement the measures proposed by the Minister in the June consultation paper. In this respect, the following measures will apply for 2016 and subsequent taxation years:
- Flat top-rate taxation will apply to grandfathered inter vivos trusts, testamentary trusts and estates, except that graduated rates will continue to apply to the first 36 months of an estate and to trusts having as their beneficiaries individuals who are eligible for the federal disability tax credit;
- Grandfathered inter vivos trusts, testamentary trusts and estates (after the first 36 months of an estate) will no longer benefit from the following rules:
- an exemption from the income tax instalment rules;
- an exemption from the requirement that trusts have a calendar year taxation year and fiscal periods that end in the calendar year in which the period began;
- the basic exemption in computing alternative minimum tax;
- preferential treatment under Part XII.2 of the Income Tax Act;
- classification as a personal trust without regard to the circumstances in which beneficial interests in the trust have been acquired;
- the ability to make investment tax credits available to a trust’s beneficiaries; and
- a number of tax administration rules that otherwise apply only to ordinary individuals.
Pursuant to the above, testamentary trusts that do not have a calendar year end will be deemed to have a taxation year end on December 31, 2015. Read more about this change in McInnes Cooper’s May 22, 2014 Post Federal Budget 2014 Tax and Estate Planning – From Testamentary Trusts to Alter Ego and Joint Partner Trusts?
- Non-Resident Trusts (Immigration Trusts): The Income Tax Act contains rules that deem non-resident trusts to be resident of Canada in prescribed circumstances. These rules generally provide a 60 month exemption for immigration trusts (e.g., where the contributor to the trust is a newly resident Canadian), such that a qualifying immigration trust is exempt on its foreign source income for 60 months. Budget 2014 proposes to fully eliminate this exemption, so that the non-resident trust rules will apply to immigration trusts. These amendments are proposed to apply to the taxation years of immigration trusts that end:
- after 2014 if (i) at any time that is after 2013 and before Budget Day the 60-month exemption applies in respect of the trust, and (ii) no contributions are made to the trust on or after Budget Day and before 2015; or
- on or after Budget Day in any other case.
CHARITIES AND NON-PROFIT ORGANIZATIONS
- Donations of Ecologically Sensitive Land. Effective for donations of ecologically sensitive land made after Budget Day, Budget 2014 proposes to extend the carry-forward period for these donations from 5 to 10 years.
- Estate Donations. For 2016 and subsequent taxation years, Budget 2014 proposes to provide more flexibility in the tax treatment of donations made in the context of a death that occurs after 2015. Donations made by will and pursuant to a designation will be deemed to have been made by the estate at the time the property is transferred, not by the individual immediately prior to death, and the donation can be applied to the taxation year of the estate in which the property is transferred, an earlier taxation year of the estate, or in the last two taxations years of the deceased individual.
- Donations of Certified Cultural Property. For donations of Certified Cultural Property made after Budget Day, Budget 2014 proposes to remove the exemption from the rule that deems the value of a gift to be no greater than its cost to the donor for donations of Certified Cultural Property acquired as part of a tax shelter gifting arrangement.
- State Supporters of Terrorism. Applicable to donations made after Budget Day, Budget 2014 proposes that the CRA may deny or revoke the registration, as the case may be, of a charity or Canadian amateur athletic organization where it accepts donations from a foreign state (or agency of such state) listed as a supporter of terrorism under the State Immunity Act.
- Consultation on Non-Profit Organizations (NPO). The income tax exemption for NPOs set out in section 149(1)(l) has changed little since 1971. Because of the significant changes to the NPO sector in Canada since that time, and the potential for abuse, the Government will review the income tax exemption for NPOs (excluding registered charities and registered Canadian amateur athletic associations), both in terms of its scope and whether sufficient transparency and accountability provisions are in place. Organizations in the NPO sector should thus expect a tightening of the rules, including increased reporting.
BUSINESS INCOME TAX MEASURES
- Remittance Thresholds for Employer Source Deductions. For amounts required to be withheld from employee source deductions after 2014, Budget 2014 proposes to reduce the tax compliance burden on employers by increasing frequency thresholds from $15,000 to $25,000 and from $50,000 to $100,000.
- Tax Incentives for Clean Energy Generation. For property acquired after Budget Day, Class 43.2 is being expanded to include water-current energy equipment and equipment used to gasify eligible waste fuel for use in a broader range of applications.
- Consultation on Eligible Capital Property (ECP). The Minister has announced a public consultation process on a proposal to repeal the eligible property regime and replace it with a new capital cost allowance (CCA) class available to businesses. As a transitional measure, existing cumulative eligible property pools would be transferred to the new CCA class and would have a 7% CCA rate for 10 years. 100% of new qualifying expenditures would be added to the new CCA class, which would have a 5% CCA rate. Due to the complexity of the ECP regime, this should be a welcome measure for taxpayers.
INTERNATIONAL TAX MEASURES
- Captive Insurance. For taxation years that end on or after Budget Day, Budget 2014 proposes to amend the existing anti-avoidance rule in the foreign accrual property income (FAPI) regime relating to the insurance of Canadian risks in reaction to certain planning which has been implemented by taxpayers to avoid the FAPI regime.
- Offshore Regulated Banks. For taxation years that begin after 2014, Budget 2014 proposes to add new conditions for qualifying under the regulated foreign financial institution exception to the FAPI regime. The intended effect is that the exception should only apply to true financial institutions.
- Back-to-Back Loans. In response to planning that seeks to avoid the thin-capitalization rules and Part XIII withholding tax on interest paid to a non-arm’s length non-resident person through the use of back to back loan arrangements involving third parties, Budget 2014 proposes to add a specific anti-avoidance rules to target these types of arrangements. These measures will apply to taxation years that begin after 2014 in respect of the thin-capitalization rules and to amounts paid or credited after 2014 in respect of Part XIII withholding tax.
- Consultation on Tax Planning by Multinational Enterprises (MNEs). The government is conducting consultations on the following questions relating to MNEs:
- What are the impacts of international tax planning by MNEs on other participants in the Canadian economy?
- Which of the international corporate income tax and sales tax issues identified in the BEPS Action Plan should be considered the highest priorities for examination and potential action by the Government?
- Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the Government?
- What considerations should guide the Government in determining the appropriate approach to take in responding to the issues identified – either in general or with respect to particular issues?
- Would concerns about maintaining Canada’s competitive tax system be alleviated by coordinated multilateral implementation of base protection measures?
The Government is also seeking input on sales tax measures to ensure the effective collection of sales tax on e-commerce sales by non-residents of Canada to residents of Canada.
- Consultation on Treaty Shopping. The Government is inviting comments on a proposed rule to prevent treaty shopping. The proposed rule would be triggered if it is reasonable to conclude that one of the main purposes of a transaction, or series of transactions, was to obtain a benefit under a tax treaty. The provision also provides for a conduit presumption, a safe-harbour presumption and a relieving provision.
SALES AND EXCISE TAX MEASURES
- Improving the Application of the GST/HST to the Health Care Sector. Budget 2014 proposes the following three changes directed to the health care sector and which apply to supplies made after Budget Day:
- Expanding the exemption which currently applies to training that is specifically designed to assist individuals with a disability to also apply to the cost of designing such a training plan;
- Exempting health care services provided by acupuncturists and naturopathic doctors; and
- Zero-rating the supply of eyewear specifically designed to treat or correct a defect of vision by electronic means where they are supplied pursuant to a written order of a physician or optometrist.
- GST/HST Election for Closely Related Persons. Effective January 1, 2015, Budget 2014 proposes to fix the technical problem associated with the application of the section 156 election (election for nil supplies within a related group) to a new company by permitting a new company to make the section 156 in prescribed circumstances. However, it is also proposed that, effective January 1, 2015, the section 156 election must be filed with the Canada Revenue Agency for parties to a new election. In that case, the election must be filed on or before the date on which any of the parties is required to file a return for the period in which the election becomes effective. In addition, parties to elections made before January 1, 2015, will be required to file the 156 election on or before January 1, 2016.
- Joint Ventures. Budget 2014 proposes to expand the joint venture election to allow more commercial joint ventures to qualify for the election, together with some anti-avoidance rules. The Minister has indicated that the draft new rules will be released for comment from interested stakeholders prior to implementation to the new rules.
- Strengthening Compliance with GST/HST Registration. Effective on Royal Assent to implementing legislation, Budget 2014 proposes to allow the CRA to register a taxpayer for GST/HST purposes where the taxpayer has failed to voluntarily register for GST/HST purposes, even after a request to do so by the CRA.
- Tobacco Taxation. Budget 2014 proposes to increase the excise duty on cigarettes to adjust for inflation since 2002 from $0.425 to $0.52575 for each five cigarettes or fraction thereof (e.g., from $17.00 to $21.03 per 200 cigarettes). The excise duty on other tobacco products will also be adjusted accordingly, including on “duty free” tobacco. In addition, a special tax will apply to inventories of tobacco held by manufacturers, importers, wholesalers and retailers held at the end of Budget Day (with an exemption for persons holding 30,000 or fewer cigarettes in inventory at such time). This special tax must be paid by April 30, 2014, together with the filing of a corresponding return.
- Standardizing Sanctions Related to False Statements in Excise Tax Returns. Budget 2014 proposes to add a new administrative monetary penalty (AMP), and to amend the existing criminal offence, for making false statements or emissions under an excise tax return (for the non GST/HST portions of the Excise Tax Act) to bring them in line with the similar provisions under the GST/HST portions of the Excise Tax Act.
- Aboriginal Tax Policy. The government reiterated its willingness to assist Aboriginal governments in implementing sales and income tax arrangements, including arrangements done in conjunction with provincial governments.
CUSTOMS TARIFF MEASURES
- Customs Tariff Treatment of the Governor General. Budget 2014 proposes to eliminate a special customs and GST/HST exemption applicable to the Governor General.
- Supporting Offshore Oil and Gas Development. Budget 2014 proposes to eliminate the 20% tariff which would otherwise apply to Mobile Offshore Drilling Units on the expiry of the Mobile Offshore Drilling Units Remission Order which is set to expire in May 2014. This will effectively make the remission order permanent. This will be beneficial to offshore exploration in both the Atlantic and Arctic regions.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Tax Solutions Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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