Global Tax Alert | 27 June 2013

Canada enacts omnibus technical bill (C-48)

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On 26 June 2013, after some of its measures had been outstanding for more than a decade, Canada’s Bill C-48, Technical Tax Amendments Act, 2012, received Royal Assent. Bill C-48 implements all the measures tabled in the House of Commons from the 24 October 2012 omnibus notice of ways and means motion (NWMM). No amendments to the bill have been made since the bill received first reading on 21 November 2012.

Bill C-48, which became substantively enacted on 21 November 2012 for IFRS reporting purposes, is enacted as of 26 June for US GAAP reporting purposes.

Bill C-48, Technical Tax Amendments Act, 2012

Bill C-48 contains nearly 1,000 pages of income tax measures that were released as draft legislation on 16 July 2010, 27 August 2010, 5 November 2010, 16 December 2010, 16 March 2011, 19 August 2011 and 31 October 2011, modified to take into account consultations and deliberations since its release.

Bill C-48 is divided into eight parts, for which the main topics are summarized in Table A below. The table indicates where the amendments originated and lists the main topics covered by each of the eight parts and their application dates.

Consequences of the enactment of this legislation

Aside from taxpayers having to apply a series of new tax measures stemming from the bill, its date of enactment triggers the countdown for a number of taxpayer actions, including various transitional elections, designations and tax return filings:

  • Offshore investment funds and non-resident trusts (Part 1) — three transitional elections
  • Foreign affiliates (Parts 2 and 3) — 17 transitional elections
  • Other technical amendments (Part 5) — 23 transitional elections and other filings, including the aggressive tax planning reporting requirement

Depending on the situation of a particular taxpayer, the taxpayer may need to consider filing one or more of these transitional elections or designations as a consequence of the legislation, to ensure they achieve a desired tax result. As well, under the new aggressive tax planning reporting measures, an information return for reportable tax avoidance transactions may be due within 120 days of Royal Assent. See Table B for a summary of the various transitional election and reporting deadlines.

In addition, a number of the amendments retroactively impact the tax treatment of transactions from prior years, so taxpayers should undertake a review of their tax filings to ensure compliance with the law as it now exists.

Finally, for corporations that report under US GAAP, the enactment of this legislation may require affected companies to account for the impact of these legislative changes in this fiscal period (see below). These changes could result in a significant financial statement impact as the amendments span a number of years.

Foreign affiliate changes

Parts 2 and 3 contain a number of amendments to the rules dealing with foreign affiliates. Some of the more notable changes deal with the calculation of a corporation’s surplus pools and access to foreign tax credits. These rules contain a variety of designations and elections that may be required to be filed with respect to prior years that will impact how the pools should be calculated. The legislation also introduces surplus ordering rules, as well as a new hybrid surplus rule that impacts the amount of tax that would be paid on a distribution.

In addition, new tax rules target certain upstream loans and indebtedness between a foreign affiliate and its parent company or, in some cases, between foreign affiliates of a parent company. In general, these new tax rules provide that the targeted upstream loans and indebtedness will, in whole or in part, be included in income of the Canadian parent company.

Generally, an entity will have two years to repay outstanding upstream loans and indebtedness to avoid the income inclusion. Loans that were made and indebtedness that arose prior to 20 August 2011 are afforded a special transition rule. With respect to the pre-20 August 2011 loans and indebtedness, if the loan or indebtedness is not repaid by 2016, then it will be included in income of the Canadian parent company in the 2014 taxation year. Loans being made or indebtedness arising on or after 20 August 2011 should be repaid within two years to avoid the income inclusion, which could be as early as 20 August 2013. When the repaid funds are distributed from the foreign affiliate, the Canadian tax on that distribution will depend on the foreign affiliates’ surplus pools as calculated under the new rules.

Financial reporting

International Financial Reporting Standards (IFRS) require companies to account for the effects of changes in tax laws and rates in the period the legislation is substantively enacted. Canadian corporations that prepare their financial statements in accordance with accounting standards for private enterprises using the future income taxes method also report changes in tax laws and rates in the fiscal period of substantive enactment.

As a result, companies reporting under IFRS must reflect the changes contained in Bill C-48 in their financial statements for fiscal periods ending on or after 21 November 2012.

US GAAP requires companies to account for the effects of changes in tax laws and rates in the period the legislation is enacted. These changes are included in a company’s estimate of its annual effective tax rate, no earlier than the first interim period that includes the enactment date. Deferred tax balances also need to be adjusted for these effects. If a change is significant, temporary differences may need to be estimated as of the enactment date.

Table A - Bill C-48

Bill part #

Corresponding previously announced amendments

Main topics

Part 1 – Offshore Investment Fund Property and NonResident Trusts

27 August 2010 Legislative Proposals (Part 1)

Offshore investment fund property:

  • Generally applicable to taxation years that end after 4 March 2010

Nonresident trusts:

  • Generally applicable to taxation years ending after 2006

Part 2 – Foreign Affiliates

27 August 2010 Legislative Proposals (Part 2)

Foreign affiliates: surplus rules and other technical amendments:

  • Various application dates, but generally applicable after 18 December 2009

Part 3 – Foreign Affiliates

19 August 2011 Legislative Proposals

Foreign affiliates: reorganizations, distributions and other technical amendments, including new hybrid surplus rules and upstream loan rules:

  • Various application dates, but generally applicable after 19 August 2011

Part 4 – Bijuralism

16 July 2010 Legislative Proposals (Part 2)

Bijuralism:*

  • Applicable on Royal Assent

Part 5 – Other Amendments

16 July 2010 Legislative Proposals (Part 1)

Acquisition of control:*

  • Various application dates

Charities and charitable donations:*

  • Various application dates, but generally applicable to gifts made after 20 December 2002

Deemed dividend rules:*

  • Various application dates

Eligible capital property rules:*

  • Various application dates

Eligible small business corporation shares – capital gains deferral:*

  • Various application dates

Expenditure limitation rules:*

  • Generally applicable on or after 17 November 2005

Mutual fund qualifying exchanges:*

  • Generally applicable to qualifying exchanges that take place after 1998
  • Replacement property rules:*
  • Various application dates

Reporting of accrued income based on production or use:*

  • Applicable on Royal Assent
  • Resources rules:*
  • Various application dates

Restrictive covenants payments:*

  • Generally applicable to amounts received or receivable, and amounts paid or payable after 7 October 2003

Securities lending arrangements:*

  • Various application dates

Taxable preferred shares and Part VI.I Tax:*

  • Various application dates

Trusts and their beneficiaries:*

  • Various application dates

27 August 2010 Legislative Proposals (Part 3)

Foreign tax credit generators:

  • Generally applicable to taxation years ending after 4 March 2010

Income trust (SIFT) conversion and loss trading:

  • Generally applicable after 4:00 p.m., 4 March 2010

Tax-avoidance transaction information return:

  • Applicable to avoidance transactions entered into after 2010, and those forming part of a series that commenced before 2011 and completed after 2010

5 November 2010 Legislative Proposals

Dispositions subject to warranty:

  • Generally applicable to taxation years and fiscal periods that end after 27 February 2004

Partnerships and their members:

  • Various application dates

Resource rules:

  • Various application dates
  • Various other technical amendments

16 December 2010 Legislative Proposals

Real estate investment trusts:

  • Applicable to the 2011 and later taxation years, and on an elective basis for the 2007 to 2010 taxation years

16 March 2011 Legislative Proposals

Contingent amounts deductibility:

  • Applicable to taxation years that end on or after 16 March 2011

Life insurance corporations’ policy reserves:

  • Various application dates

Withholding tax applicable to interest payments made to nonresidents:

  • Various application dates

31 October 2011 Legislative Proposals (Part 1)

Employment income:

  • Applicable in respect of benefits received or enjoyed on or after 31 October 2011

Full-rate taxable income (exclusion of personal services business income):

  • Applicable to taxation years that begin after 31 October 2011

Life insurance corporations – various technical amendments:

  • Various application dates

Mortgage investment corporations:

  • Generally applicable after 31 October 2011

Mutual fund corporations:

  • Various application dates

Shareholder benefits:

  • Generally applicable to benefits conferred on or after 31 October 2011

Shareholder loans:

  • Effective for loans and indebtedness arising after 31 October 2011

Various other technical amendments

New measures

Labour-sponsored venture capital corporations:

  • Various application dates

Provincial allocation of income of airline corporations:

  • Applicable to taxation years ending after 24 October 2012

Shares owned by short-term residents:

  • Various application dates

Part 6 – Sales Taxes

31 October 2011 Legislative Proposals (Part 2)

GST/HST relieving measure (private copying levy):

  • Applicable 19 March 1998

Part 7 – Tax Agreements**

N/A

  • Amendments to the Federal-Provincial Fiscal Arrangements Act and to the First Nations Goods and Services Tax Act:
  • Applicable on Royal Assent

Part 8 – Coordinating Amendments

N/A

Coordinating amendments in respect of Bill C-45

*May include measures previously contained in former Bill C-10. [2007]

**Not included in the 24 October 2012 NWMM.

Table B – Transitional election and reporting due dates

Due date

Provisions

60th day after royal assent

Extended deadline for stock options deferral election

90th day after royal assent

US tax free spin-offs; charities designation; Part III tax; dividend rental arrangements; securities lending arrangements

120th day after royal assent

Reporting for tax-avoidance transactions

180th day after royal assent

ACB of share re s. 84(1) dividend; restrictive covenants; Part XIII tax re non-resident reinsurers; overriding of Income Tax Act statute-barring provisions for foreign-affiliate-related changes

Later of filing-due date for the taxation year that includes royal assent and one year after royal assent

Foreign affiliate consolidated net surplus election and modified consolidated net surplus election; foreign mergers (including foreign absorptive mergers); liquidations and dissolutions of foreign affiliates; upstream loans rules; disposition of foreign affiliate shares (including loss limitation rules);foreign affiliates carrying on insurance business; foreign affiliate fresh start rules; foreign affiliate gain and loss computation rules; foreign affiliate tax rollover exception provisions; pre-acquisition surplus election

Filing-due date for the taxation year that includes royal assent

Eligible small business corporation share exchanges; capital gain inclusion rate in 2000 for partnership member; undistributed trust gains; disposition of tiered partnership re lifetime capital gain exemption; real estate investment trusts; reassessment former residents; stock dividend paid by a NR; loss/retention of testamentary trust status; SIFT trust, SIFT partnership, or REIT acquisition of control; non-resident trust rules

No later than 12 months after royal assent

Definition of testamentary trust

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (Canada), Toronto
  • George Guedikian
    +1 416 943 3878
    george.b.guedikian@ca.ey.com
  • John Oatway
    +1 416 943 2709
    john.oatway@ca.ey.com
Ernst & Young LLP (Canada), Ottawa
  • Fred O’Riordan
    +1 613 598 4808
    fred.r.oriordan@ca.ey.com
Ernst & Young LLP (Canada), Quebec and Atlantic Canada
  • Albert Anelli
    +1 514 874 4403
    albert.anelli@ca.ey.com
Ernst & Young LLP (Canada), Prairies
  • Warren Pashkowich
    +1 403 206 5168
    warren.w.pashkowich@ca.ey.com
Ernst & Young LLP (Canada), Vancouver
  • Greg Noble
    +1 604 891 8221
    greg.noble@ca.ey.com
Couzin Taylor LLP, Toronto
  • Daniel Sandler
    +1 416 943 4434
    daniel.sandler@ca.ey.com
Ernst & Young LLP, New York, Canadian Tax Desk
  • Andrea Lepitzki
    +1 212 773 5415
    andrea.lepitzki@ey.com

EYG no. CM3569