Finance Minister Bill Morneau presented the 2018 Federal Budget on February 27, 2018. The following is a summary of the key measures proposed.
Medical Expense Tax Credit – Eligible Expenditures
The budget proposes to expand the medical expense tax credit to recognize such expenses where they are incurred in respect of an animal specially trained to perform tasks for a patient with a severe mental impairment in order to assist them in coping with their impairment (e.g., a psychiatric service dog trained to assist with post-traumatic stress disorder).
This measure will apply in respect of eligible expenses incurred after 2017.
Registered Disability Savings Plan – Qualifying Plan Holders
The budget proposes to extend the temporary program whereby a qualifying family member can be the plan holder of an adult individual’s RDSP in situations where the capacity of that individual to enter into a contract is in doubt. The budget proposes to extend the temporary measure by five years, to the end of 2023.
Deductibility of Employee Contributions to the Enhanced Portion of the Québec Pension Plan
The budget proposes a deduction for employee contributions (as well as the “employee” share of contributions made by self-employed persons) to the enhanced portion of the Quebec Pension Plan (QPP). In this regard, Quebec announced that the enhanced portion of employee CPP and QPP contributions will be deductible for Quebec income tax purposes. This measure will apply to the 2019 and subsequent taxation years.
In instances, where the registration of a charity is revoked, at the request of the charity or because the charity has not complied with its registration requirements, a 100% revocation tax is imposed on the charity, based on the total net value of its assets. A charity can reduce the amount of revocation tax by making qualifying expenditures. The budget proposes to allow transfers of property to municipalities to be considered qualifying expenditures for the purposes of the revocation tax, subject to the approval of the Minister of National Revenue on a case-by-case basis. This measure will apply to transfers made on or after February 27, 2018.
Where donations are made to a university outside Canada, the budget proposes to allow individuals who make such donations the ability to claim a charitable donation tax credit, even where the university is not listed in the Income Tax Regulations, effective February 27, 2018.
Mineral Exploration Tax Credit for Flow-Through Share Investors
The budget proposes to extend eligibility for the mineral exploration tax credit for an additional year. As a result, the credit will apply to flow-through share agreements entered into on or before March 31, 2019.
Reporting Requirements for Trusts
A trust that does not earn income or make distributions in a year is generally not required to file an annual (T3) return of income. A trust is required to file a T3 return if the trust has tax payable or it distributes all or part of its income or capital to its beneficiaries. Even if a trust is required to file a return of income for a year, there is no requirement for the trust to report the identity of all its beneficiaries.
The budget proposes to require that certain trusts provide additional information on an annual basis, including the identities of all trustees, beneficiaries, settlors of the trust, and each person who has the ability (through the trust terms or a related agreement) to exert control over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector). The new reporting requirements will impose an obligation on certain trusts to file a T3 return where one is currently not required and will apply to express trusts that are resident in Canada and to non-resident trusts that are currently required to file a T3 return. An express trust is generally a trust created with the settlor’s express intent, usually made in writing. Exceptions to the additional reporting requirements are proposed for the following types of trusts:
These proposed new reporting requirements will apply for the 2021 and subsequent taxation years.
In addition, the budget introduces new penalties for a failure to file a T3 return, including a beneficial ownership schedule where required, equal to $25 for each day, with a minimum penalty of $100 and a maximum penalty of $2,500. If a failure to file the return was made knowingly or due to gross negligence, an additional penalty equal to 5% of the maximum fair market value of property held during the relevant year by the trust will apply, with a minimum penalty of $2,500. Existing penalties will also continue to apply. The new penalties will apply in respect of returns required to be filed for the 2021 and subsequent taxation years.
Passive Investment Income
The budget proposes two measures, applicable to taxation years that begin after 2018, to limit tax deferral advantages on passive investment income earned inside private corporations:
1. Small Business Limit Reduction – The business limit will be reduced on a straight-line basis for CCPCs and their associated corporations having between $50,000 and $150,000 of investment income in the year. The business limit would be reduced to zero at $150,000 of investment income. This measure will affect CCPCs only to the extent that their business income exceeds the reduced small business limit.
The business limit reduction under this measure will operate alongside the business limit reduction that applies in respect of taxable capital in excess of $10 million. The reduction in a corporation’s business limit will be the greater of the reduction under this measure and the existing reduction based on taxable capital.
Investment income will be measured by a new concept of “adjusted aggregate investment income” which will be based on “aggregate investment income” adjusted for the following:
2. Refundability of Taxes on Investment Income – The second measure proposes a dividend refund be available only in cases where a private corporation pays non-eligible dividends. No dividend refund will be available on the payment of eligible dividends. However, an exception will be provided in respect of RDTOH that arises from eligible portfolio dividends received by a corporation. The corporation will then be able to obtain a refund of that RDTOH upon the payment of eligible dividends.
The different treatment proposed regarding the refund of taxes imposed on eligible portfolio dividend income will necessitate the addition of a new RDTOH account. This new account (eligible RDTOH) will track refundable taxes paid under Part IV of the Income Tax Act on eligible portfolio dividends. Any taxable dividend (i.e., eligible or non-eligible) will entitle the corporation to a refund from its eligible RDTOH account.
The second RDTOH account (non-eligible RDTOH) will track refundable taxes paid under Part I of the Income Tax Act on investment income as well as under Part IV on non-eligible portfolio dividends (i.e., dividends that are paid by non-connected corporations as non-eligible dividends). Refunds from this account will be obtained only upon the payment of non-eligible dividends.
These new measures are subject to an ordering rule which indicates that upon the payment of a non-eligible dividend, a private corporation will be required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.
For the first taxation year beginning after 2018, an existing RDTOH balance will be allocated as follows:
These measures will apply to taxation years that begin after 2018.
Tax Support for Clean Energy
The budget proposes to extend eligibility for investment in specified clean energy generation and conservation equipment under capital cost allowance (CCA) regime Class 43.2 to property acquired before 2025 (from 2020). Under the capital cost allowance regime, Class 43.2 generally provides a 50% accelerated CCA rate on a declining-balance basis for investments in specified clean energy generation and conservation equipment.
At-Risk Rules for Tiered Partnerships
The budget proposes to clarify that the at-risk rules apply to a partnership that is itself a limited partner of another partnership. In particular, for a limited partnership that is a member of another limited partnership, the lower-tier partnership losses that can be allocated to its partners will be restricted by the upper tier partnership’s at-risk amount in respect of the lower-tier partnership. Furthermore, the budget proposes that limited partnership losses of a limited partner that is itself a limited partnership, will not be eligible for indefinite carryforward. These losses will be reflected in the adjusted cost base of the partnership’s interest in the lower-tier limited partnership.
This measure will apply in respect of taxation years that end on or after February 27, 2018, including in respect of losses incurred in taxation years that end prior to February 27, 2018.
Cross-border surplus stripping using partnerships or trusts
The budget proposes to amend the cross-border anti-surplus-stripping rule and the corresponding corporate immigration rule to add comprehensive “look-through” rules for partnerships and trusts. These rules will allocate the assets, liabilities and transactions of a partnership or trust to its members or beneficiaries, as the case may be, based on the relative fair market value of their interests. This measure will apply to transactions that occur on or after February 27, 2018. Transactions that occur before February 27, 2018 may be challenged using the general anti-avoidance rule.
The budget proposes modifications to certain rules related to foreign affiliates.
Investment Businesses: The investment business definition applies on a business-by-business basis. Accordingly, to the extent that a single foreign affiliate carries on multiple businesses, each such business would have to meet the six employees test in order to ensure that it is not an investment business. Certain taxpayers whose foreign investment activities would not warrant more than five full-time employees have engaged in tax planning with other taxpayers in similar circumstances seeking to meet the six employees test.
The budget introduces a rule for the purposes of the investment business definition so that, where income attributable to specific activities carried out by a foreign affiliate accrues to the benefit of a specific taxpayer under a tracking arrangement, those activities carried out to earn such income will be deemed to be a separate business carried on by the affiliate. Each separate business of the affiliate will therefore need to satisfy each relevant condition in the investment business definition, including the six employees test, in order for the affiliate’s income from that business to be excluded from “foreign affiliate property income” (FAPI). This measure will apply to taxation years of a taxpayer’s foreign affiliate that begin on or after February 27, 2018.
Controlled Foreign Affiliate Status: The budget proposes to deem a foreign affiliate of a taxpayer to be a controlled foreign affiliate of the taxpayer if FAPI attributable to activities of the foreign affiliate accrues to the benefit of the taxpayer under a tracking arrangement. This measure will apply to taxation years of a taxpayer’s foreign affiliate that begin on or after February 27, 2018.
Reassessments: The budget extends the reassessment period for a taxpayer by three years in respect of income arising in connection with a foreign affiliate of the taxpayer. This measure will apply to taxation years of a taxpayer that begin on or after February 27, 2018.
T1134 Reporting Requirements: The budget proposes to bring the T1134 deadline in line with the taxpayer’s income tax return deadline by requiring the information returns to be filed within six months (currently 15 months) after the end of the taxpayer’s taxation year. This measure will apply to taxation years of a taxpayer that begin after 2019.
GST/HST and Investment Limited Partnerships
The budget confirms the Government’s intention to proceed with the proposals announced September 8, 2017 with the following changes:
1. The GST/HST applies to management and administrative services rendered by the general partner on or after September 8, 2017, and not to management and administrative services rendered by the general partner before September 8, 2017 unless the general partner charged GST/HST in respect of such services before that date. In addition, the GST/HST will be payable on the fair market value of management and administrative services in the period in which these services are rendered.
2. An investment limited partnership can make an election to advance the application of the special HST rules as of January 1, 2018.
The budget proposes to advance the existing inflationary adjustments for tobacco excise duty rates to occur on an annual basis rather than every five years. The budget also proposes to increase the excise duty rates by an additional $1 per carton of 200 cigarettes, along with corresponding increases to the excise duty rates on other tobacco products. Inventories of cigarettes held by manufacturers, importers, wholesalers and retailers at the end of February 27, 2018, will be subject to an inventory tax of $0.011468 per cigarette (subject to certain exemptions).
Taxpayers will have until April 30, 2018 to file returns and pay the cigarette inventory tax
The budget proposes a new federal excise duty framework for cannabis products that generally applies to all products available for legal purchase. Cannabis cultivators and manufacturers will be required to obtain a cannabis license from the CRA and remit the excise duty, where applicable. The framework will come into effect when cannabis for non-medical purposes becomes available for legal retail sale.
Reassessment Period – Requirements for Information and Compliance Orders
The budget proposes to introduce a “stop-the-clock” rule that will extend the reassessment period of a taxpayer by the period of time during which the requirement or compliance order is contested. The period would start from the time the taxpayer submits an application for judicial review of the CRA’s requirement for information or at the time the taxpayer opposes the CRA’s application for a compliance order. This measure will apply in respect of challenges instituted after Royal Assent to the enacting legislation.
Reassessment Period – Non-Resident Non-Arm’s Length Persons
The budget proposes to provide the CRA with an additional three years to reassess a prior taxation year of a taxpayer, to the extent the reassessment relates to the adjustment of the loss carry back, where:
Rules for Limited Partnerships
The Government proposes to clarify the application of certain rules for limited partnerships in order to prevent taxpayers from obtaining unintended tax advantages through the use of complex partnership structures.
The budget confirms the Government’s intention to proceed with the income tax measures released on December 13, 2017 to address income sprinkling.
Jennifer Warner, LL.B., LL.M. Tax and Élisabeth Daigneault, LL.B., M. Tax