Global Tax Alert | 23 October 2013

Canada's second budget implementation bill receives first reading

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On 22 October 2013, Canada’s Bill C-4, Economic Action Plan 2013 Act, No. 2, received its first reading in the House of Commons. Bill C-4 implements many of the remaining 2013-14 federal budget measures, as well as the 25 July 2012 SIFT (specified investment flow-through entity) and REIT (real estate investment trust) measures and 21 December 2012 technical amendments as modified to take into account consultations and deliberations since their release. Bill C-4 also implements relieving measures included in two previously issued comfort letters related to the Part XI.01 penalty tax rules for registered plans.

Bill C-4 federal budget measures

Bill C-4 includes the following business income tax measures, which are now substantively enacted for Canadian financial reporting purposes:

  • Loss trading transactions — Expansion of the acquisition of control (AOC) measures related to corporations and extension of the AOC rules to trusts.

Generally applicable to transactions occurring on or after 21 March 2013.

  • Synthetic dispositions — Measures targeting certain financial arrangements that seek to defer tax or obtain other tax benefits by allowing a taxpayer to economically dispose of property while continuing to own it for income tax purposes.

Applicable to agreements and arrangements entered into on or after 21 March 2013, and to agreements and arrangements entered into before 21 March 2013 if their term is extended on or after 21 March 2013.

  • Character conversion transactions — Measures targeting certain financial arrangements designed to convert income-like economic returns into capital gains through the use of derivative contracts.

Subject to certain transitional relief, these measures are generally applicable to derivative forward agreements entered into on or after 21 March 2013, and to certain agreements entered into before 21 March 2013.

  • Thin capitalization rules — Extension of the rules to Canadian-resident trusts and nonresident corporations and trusts that carry on business in Canada or elect to be taxed on a net income basis under section 216 of the Income Tax Act, as well as partnerships having members that are such entities.

Generally applicable for taxation years beginning after 2013.

  • Other 2013–14 budget business measures — Measures that expand the eligibility for accelerated capital cost allowance (CCA) for clean energy generation equipment, phase-out the accelerated CCA write-off for mining property, treat pre-production mine development expenses as Canadian development expenses (CDE) rather than Canadian exploration expenses (CEE), extend the normal reassessment period for Form T1135 tax shelters and reportable transactions, adjust the five-year phase-out of the additional deduction for credit unions, impose a new penalty for missing, incomplete or inaccurate information on SR&ED (scientific research and experimental development) third-party service providers and billing arrangements, and impose sanctions in respect of electronic suppression of sales software.

Various application dates.

  • 25 July 2012 measures concerning SIFTs and REITs — Measures primarily relating to the taxation of SIFTs, REITs and publicly traded corporations, including measures concerning stapled securities, the definition of an excluded subsidiary entity, nonportfolio property of a corporation, and tax installment requirements for SIFTs.

Various application dates.

  • 21 December 2012 tax technical changes — Various other business income tax technical changes, including changes relating to the anti-deferral rules for corporate partnerships, the section 55 anti-avoidance rules in respect of capital gains stripping, the wind-up rules, the CCA principal business exception for purposes of the rental property, leasing property and specified energy property rules, the treatment of guarantee fees under the transfer pricing rules, the definition of Canadian renewable and conservation expense, the requirement for a railway company to capitalize certain expenditures, refundable investment tax credits, cooperative corporations, and credit unions.

Various application dates.

Outstanding 2013-14 federal budget measures

The following proposed business measures announced in the 2013-14 federal budget are not included in Bill C-4 and, therefore, remain outstanding:

  • Labor-sponsored venture capital corporations — Measures related to the phase-out of the labor-sponsored venture capital corporation tax credit, such as investment requirements, wind-ups and redemptions (consultation period closed on 23 July 2013).
  • Financial intermediaries — Measures requiring certain financial intermediaries to report to the CRA international electronic fund transfers of $10,000 or more.
  • Treaty shopping — Consultation on possible measures to address the practice of treaty shopping (consultation was launched on 12 August 2013 and closes on 13 December 2013).
  • GST/HST — Measures related to the supplies of paid parking through charities.

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. CM3898