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CPA CANADA FEDERAL BUDGET COMMENTARY 2018

The Federal Government’s 2018 Budget touts Canada’s strong economic growth

over the past two years, including real GDP growth of 3.2 per cent since the

second quarter of 2016, an unemployment rate of 5.9 per cent, and significant

improvements in average weekly earnings, consumer confidence, and

household consumption. The Finance Minister expects similar growth in the

near-term. In addition, federal revenues increased by more than 11 per cent in

2017, largely from personal and corporate income taxes.

With this positive economic activity and outlook, the government has presented

an “Equality and Growth,” budget that includes tens of billions of

dollars in new or increased spending over the next six years, with the goal of

further growing government revenues by increasing economic participation

among women, visible minority Canadians and persons with disabilities, as well

as substantial long-term investments in science and technology.

The government suggests that increasing equality for women and enhancing

women’s participation in the workplace (especially in technology and trades)

could add $150 billion to the Canadian economy over the next decade.

Highlights include:

• Reducing the small business tax rate to 10 per cent effective January 1,

2018 and 9 per cent as of January 1, 2019

• Additional reporting requirements for trusts (effective 2021 tax year)

• Extending eligibility for accelerated capital cost allowance for certain

clean energy equipment

• Enhancing and renaming the Working Income Tax Benefit (starting 2019)

• Annual indexation of the Canada Child Benefit (starting July 1, 2018)

 

2 CPA Canada Federal Budget Commentary 2018

• “Use it or lose it” EI parental benefits (expected availability June 2019)

• Reducing access to the small business tax rate for businesses with high

passive investment income (expected to apply 2019)

• Applying GST/HST to management and administrative services provided

to an investment limited partnership by the general partner (after September

8, 2017)

• Additional new measures to prevent tax avoidance

• Adjusting tobacco excise duty rates annually (starting April 1, 2019)

• Grants and funds to attract women to “Red Seal” trades and construction

(starting 2018–19)

• Pre-apprenticeship assistance for underrepresented groups

(starting 2018–19)

The Finance Minister has not set a timeline for balancing the budget, but has

substantially reduced the projected annual deficits through 2022–23 and expects

the net debt-to-GDP ratio to decline over the period as well. The previously

projected deficit for 2017–18 was $28.5 billion and now sits at $19.4 billion.

Similarly, the projected deficit for 2021–22 was $18.8 billion and has been revised

down to $13.8 billion. The net debt-to-GDP ratio is currently 31 per cent and is

projected to decline to 28.4 per cent by 2022–23.

BUSINESS INCOME TAX MEASURES

Passive Investment Income Earned by Private Corporations

The Budget proposes to introduce measures to reduce perceived tax advantages

where a private corporation earns passive income. The announcement

that such measures were going to be introduced was first made on July 18,

2017, along with other substantive measures intended to reduce the ability of

taxpayers to sprinkle income among family members. The Budget proposals

bear little resemblance to the measures initially announced.

The Budget proposes two sets of new provisions. One set is intended to

reduce the $500,000 business limit otherwise available to a group of associated

Canadian-controlled private corporations (CCPCs) where the group earns

a significant amount of passive income. The second set reduces, but does not

eliminate, the ability of a corporation to obtain refunds of refundable dividend

tax on hand (RDTOH) by paying eligible dividends as compared to non-eligible

dividends.

CPA Canada Federal Budget Commentary 2018 3

$500,000 Business Limit Reduction

The business limit of an associated group of CCPCs is already reduced where

the group’s “taxable capital employed in Canada” exceeds $10,000,000.

The proposed provisions will reduce the group’s business limit on a straight line

basis where the group earns “adjusted aggregate investment income” between

$50,000 and $150,000. The reduction will be $5 for every $1 of investment

income. Consequently, a group’s business limit will be reduced to zero (5 ×

$100,000 = $500,000) in a particular year if its adjusted aggregate investment

income is $150,000 or more.

A group’s adjusted aggregate investment income for the year will be based

on aggregate investment income, as determined in computing the amount of

RDTOH, and is subject to the following adjustments:

• Dividends from non-connected corporations will be added.

• Taxable capital gains will be excluded to the extent that they arise from

the disposition of assets used principally in an active business carried on

primarily in Canada by the CCPC or a related CCPC.

• Taxable capital gains will also be excluded to the extent that they arise

from the disposition of shares of a connected CCPC where all or substantially

all of the fair market value of the assets of the connected CCPC is

attributable to assets that are used principally in an active business carried

on primarily in Canada.

• Net capital losses carried over from other taxation years will be excluded.

• Income from savings in a life insurance policy that is not an “exempt

policy” will be added to the extent it is not otherwise included in aggregate

investment income.

This reduction to the business limit is based on income for the year that

ended in the preceding calendar year.

This proposal will apply to taxation years that commence after 2018 with no

grandfathering of passive income earned on existing investments. Consequently,

all future investment earnings will be included in this annual test, regardless of

when the applicable investments were accumulated.

The reduction of a corporation’s business limit for a particular year will be equal

to the greater of the reduction under the existing taxable capital rule and the

proposed rule.

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Anti-avoidance measures will discourage transactions designed to delay or

avoid the new rules. One such transaction might otherwise have been the

creation of a short taxation year. Another might have been the transfer of

property to a related but unassociated corporation.

Changes to RDTOH

Currently, a dividend refund is available to a corporation at the rate of

38 1/3 per cent of taxable dividends paid to the extent that there is an available

balance of RDTOH at the corporation’s year-end. The taxable dividends paid

can be either non-eligible dividends or eligible dividends. There is a tax advantage

where eligible dividends are paid.

The Budget proposes to introduce measures that will generally allow a CCPC

to recoup RDTOH only on the payment of non-eligible dividends. An exception

will apply to RDTOH arising on the payment of Part IV tax on eligible portfolio

dividends. Such RDTOH can be recouped on the payment of eligible dividends.

To accomplish this, the Budget proposes to create an “eligible RDTOH” account

and a “non-eligible RDTOH” account. As indicated above, eligible RDTOH will

include only Part IV tax paid on the receipt of eligible portfolio dividends. All

other RDTOH will be included in the non-eligible RDTOH account.

If a corporation pays a non-eligible dividend, it recoups non-eligible RDTOH

before it recoups eligible RDTOH. If it pays an eligible dividend, it can recoup

eligible RDTOH. Any taxable dividend paid, either eligible or non-eligible, will

entitle the corporation to a refund of eligible RDTOH.

The existing RDTOH of a CCPC will first be allocated to its eligible RDTOH

account to a maximum of 38 1/3 per cent of its general rate income pool (GRIP).

The remainder, if any, of its existing RDTOH balance will be allocated to its

non-eligible RDTOH account. All of the existing RDTOH of other corporations

will be allocated to their eligible RDTOH account.

This measure will apply to taxation years that commence after 2018. An antiavoidance

measure will prevent the deferral of the new measures by creating

a short taxation year.

Income Sprinkling Measures

Overview

The Budget confirms that Finance will proceed with the implementation of the

December 13, 2017, draft proposals that address income sprinkling involving

private corporations.

CPA Canada Federal Budget Commentary 2018 5

The Tax on Split Income (TOSI) regime that existed prior to 2018 (commonly

referred to as the “kiddie tax” rules), impacted only Canadian-resident minors.

It essentially taxed at the top marginal rate certain types of income that they

earned, including taxable dividends or shareholder benefits from private company

shares, income allocations from partnerships or trusts that were derived

from the business or profession of a related person, and 100 per cent of capital

gains from non-arm’s-length sales of private company shares (such gains were

converted to non-eligible taxable dividends).

The December 13, 2017, draft legislative proposals represent a major broadening

of the old TOSI rules and will become effective as of January 1, 2018.

The proposed TOSI rules can apply to any Canadian resident, regardless of

age. Further, types of income in addition to those under the old rules described

above could be caught. Such income types include interest on debt obligations

from private corporations and certain partnerships and trusts, taxable capital

gains from the sales of partnership or trust interests that either generate TOSI

or derive part of their value from private company shares, and taxable capital

gains on arm’s-length sales of private company shares. With respect to the

latter, however, the TOSI rules will not apply to the arm’s-length sale of qualified

small business corporation shares (QSBC shares) that are eligible for the

lifetime capital gains exemption even if the lifetime capital gains exemption is

not claimed.

The taxation of capital gains from the non-arm’s length sale of private company

shares by a minor will remained unchanged: 100 per cent of such capital

gains will still be converted to non-eligible taxable dividends. Further, the ability

of adults to sell QSBC shares to non-arm’s-length parties without triggering

the TOSI will remain intact. TOSI will not apply to capital gains arising from the

sale of farming or fishing properties that qualify for the lifetime capital gains

exemption — again, even if the lifetime capital gains exemption is not claimed.

Exclusions

Several exclusions from TOSI must be considered in order to determine if the

tax applies. No adult of any age is subject to TOSI on income from an unrelated

business. Also, the proposals introduce some “bright line” tests as well as

a general reasonableness test that could operate to exclude an individual from

the new TOSI rules. These tests are not mutually exclusive and vary based on

the age of the individual in question.

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An adult of any age will not be subject to TOSI on income derived from an

“excluded business”, i.e., one in which the individual is actively engaged on a

“regular, continuous and substantial basis” in the taxation year in which the

income amount is received, or in any five previous taxation years that need not

be consecutive. This generally requires that the adult work in the business for

at least an average of 20 hours per week during the part of the year that the

business operates. However, if this 20-hour threshold is not met, it would be a

question of fact whether or not the individual is actively engaged in the business

on a regular, continuous and substantial basis.

Income derived by adults over the age of 24 from “excluded shares” is not

subject to TOSI. To meet the definition of an excluded share, several conditions

must be met.

• The individual in question must directly own at least 10 per cent of the

votes and value of the corporation.

• The corporation must earn less than 90 per cent of its income from the

provision of services.

• The corporation cannot be a professional corporation, such as those carried

on by medical doctors, dentists, accountants, lawyers, chiropractors

and veterinarians.

• All or substantially all of the corporation’s income cannot be derived from

a related business in respect of the individual.

If taxpayers restructure their corporations in order to meet the excluded

share definition by the end of 2018, this exception will be available to them for

the entire 2018 taxation year. Taxpayers and their advisors may want to pay

particular attention to this exclusion when setting up a new corporation or

undergoing a traditional estate freeze, as it is conceivable that it may be relied

upon heavily in these contexts.

If income earned by the spouse of a business owner aged 65 or more would

not be subject to TOSI had the business owner earned it directly, then the

spouse’s income would not be subject to TOSI. There is no requirement that

the spouse be aged 65 or over for this exclusion to be met.

There are various exclusions for inherited property.

Taxable capital gains arising from the deemed disposition on the death of an

individual as well as income derived from property acquired on the breakdown

of a marriage or common-law partnership are also excluded from TOSI.

CPA Canada Federal Budget Commentary 2018 7

If none of the above exclusions from the TOSI rules apply, the reasonableness

tests must be considered. This is because only income in excess of a “reasonable

return” will be subject to TOSI.

For adults over the age of 24, a reasonable return will take into account various

factors, including labour contributions, property contributions, risk assumed,

historical payments, and any other relevant factors. As these factors do not

include any thresholds in terms of hours worked or amounts contributed, there

is a high degree of subjectivity with this test.

For adults between the ages of 18 and 24, what is considered to be a reasonable

return is more precisely defined, but greatly limited. Only capital

contributed will be considered.

Tax Support for Clean Energy

Capital cost allowance (CCA) Classes 43.1 and 43.2 provide accelerated

CCA rates for investments in specified clean energy generation and conservation

equipment. Class 43.2 was introduced in 2005 and is currently available

in respect of property acquired before 2020. The Budget proposes to extend

eligibility for Class 43.2 by five years to include property acquired before 2025.

Artificial Losses Using Equity-Based Financial Arrangements

A corporation can generally deduct dividends received on a share of a corporation

resident in Canada (a “Canadian share”). However, the current “dividend

rental arrangement” rules deny this deduction where the main reason for an

arrangement is to enable the taxpayer to receive a dividend on a Canadian

share, and the risk of loss or opportunity for gain or profit accrues to someone

else.

The Government is concerned that certain taxpayers are still engaging in

abusive arrangements that are intended to circumvent the dividend rental

arrangement rules and result in an artificial tax loss on the arrangement. Consequently,

the Budget proposes an amendment which broadens the dividend

rental arrangement rules and securities lending arrangement rules in order

to prevent taxpayers from claiming a deduction for inter-corporate dividends

received in situations where substantially all of the opportunity for gain or

profit or risk of loss in respect of a Canadian share rests with certain persons

other than the taxpayer. Similar rules are proposed to clarify situations in which

a dividend compensation payment can be deducted.

These proposed rules are generally effective for dividends paid, or dividend

compensation payments made, on or after February 27, 2018.

8 CPA Canada Federal Budget Commentary 2018

Stop-Loss Rule on Share Repurchase Transactions

The Budget proposes an amendment to the dividend stop-loss rule to decrease

the tax loss on a repurchase of shares held by the taxpayer as mark-to-market

property where it receives a tax deductible inter-corporate dividend on the

repurchase. This amendment generally reduces the tax loss by the full amount

of the deemed dividend.

This proposal will apply to share repurchases occurring on or after

February 27, 2018.

At-Risk Rules for Tiered Partnerships

In response to a recent Federal Court of Appeal ruling, the Budget proposes to

restrict the allocation of losses to members of a top-tier partnership in tiered

partnership structures for taxation years that end on or after February 27, 2018,

including losses incurred in tax years that ended prior to that date. The allocable

losses of a second-tier partnership will be restricted by the at-risk amount

of the top-tier partnership, and unused losses will not be eligible to be carried

forward indefinitely. Such unused losses will be added to the adjusted cost

base of the partnership interest of the second-tier partnership.

Health and Welfare Trusts (HWT)

An HWT is a trust established by an employer to provide health and welfare

benefits to its employees. Since the tax treatment of HWTs is not set out in the

ITA, CRA has published an administrative position which sets out the requirements

of HWTs and the income tax consequences.

The Budget proposes to discontinue the application of CRA’s administration

position after the end of 2020 in order to encourage conversion of such trusts

to employee health and life trusts for which there are specific rules in the ITA.

The Department of Finance has requested comments by June 29, 2018, on the

transitional rules.

PERSONAL INCOME TAX MEASURES

The Budget did not propose a number of changes that were the subject

of speculation prior to the Budget. The capital gains inclusion rate will not

increase and remains at 50 per cent. In addition, proposals in respect of “surplus

stripping” first introduced in July 2017 and then abandoned have not

been reintroduced.

Personal income tax rates will not increase under the Budget.

 

CPA Canada Federal Budget Commentary 2018 9

Canada Workers Benefit (CWB)

The Budget enhances the existing Working Income Tax Benefit and renames

it as the Canada Workers Benefit, effective for 2019 and subsequent years.

The CWB will be 26 per cent of “earned income” in excess of $3,000 to a

maximum of $1,355 for single taxpayers without dependents and $2,335 for

families (couples and single parents). The CWB is reduced where net income

exceeds a threshold amount. The CWB disability supplement for individuals

certified as eligible for the disability credit will be $700. Amounts will be

indexed after 2019.

The Budget also proposes to allow the CRA to determine if a taxpayer is

eligible for the CWB even if not claimed on their tax return and assess as if it

had been claimed. This measure applies to tax returns for 2019 and subsequent

taxation years.

Medical Expense Tax Credit (METC) — Service Animals

The Medical Expense Tax Credit is currently available in respect of expenses

incurred for a service animal specially trained to assist an individual in coping

with blindness, profound deafness, severe diabetes, severe epilepsy, severe

autism or a severe and prolonged impairment that markedly restricts the use

of the individual’s arms or legs. The Budget proposes to extend the METC to

expenses for animals specially trained to perform tasks for an individual with

a severe mental impairment. An example is a psychiatric service dog trained to

assist an individual with post-traumatic stress disorder.

Expenses for animals that provide comfort or emotional support, but are not

specially trained, will not qualify. Qualifying expenses include the cost of the

animal, costs for care and maintenance such as food and veterinary care, and

costs for training the individual in handling the animal. This measure will apply

in respect of expenses incurred after 2017.

Registered Disability Savings Plans (RDSP)

The plan holder of a Registered Disability Savings Plan must be the individual’s

legal representative where the capacity of the of the individual to enter into a

contract is in doubt, for example where the individual has a cognitive disability.

Where the individual does not have a legal representative in place, certain

family members (parents, spouses and common-law partners) are allowed to

be the RDSP plan holder. This provision was to expire at the end of 2018. The

10 CPA Canada Federal Budget Commentary 2018

Budget extends it to the end of 2023. If a family member becomes a plan

holder before the end of 2023, they will be able to continue as the plan holder

after 2023.

Contributions to Enhanced Portion of the Quebec Pension Plan

(QPP)

Individuals are currently entitled to a non-refundable credit in respect of

employee contributions and the “employee” portion of self-employed contributions

to the Quebec Pension Plan. The QPP is being enhanced, starting in 2019.

The Budget proposes that the enhanced part of the contributions be deductible

to the individual.

Child Benefits

Foreign-born Status Indians who legally reside in Canada but are neither

Canadian citizens nor permanent residents are eligible for the Canada Child

Benefit (CCB), provided all other eligibility requirements are met. The Budget

proposes to make them retroactively eligible for the Canada Child Tax Benefit,

the National Child Benefit supplement and the Universal Child Care Benefit, the

predecessors to the current CCB.

The Budget also proposes to provide authority for the federal government to

share taxpayer CCB information with the provinces for the purpose of administering

their social assistance payment regimes. This measure is effective July 1, 2018.

Mineral Exploration Tax Credit for Flow-Through Share Investors

Eligibility of the Mineral Exploration Tax Credit is proposed to be extended for

one year under the Budget. The credit will apply to expenses renounced under

flow-through share agreements entered into on or before March 31, 2019.

Employment Insurance Parental Sharing Benefit

The Budget proposes a new five-week Employment Insurance Parental Sharing

Benefit, effective June 2019. This benefit will be available as a top-up in situations

where both parents agree to share parental leave. It will be available to

eligible two-parent families, including same sex-couples and adoptive parents.

This new benefit is intended to provide greater flexibility, particularly for mothers,

to return to work sooner.

Apprenticeship Incentive Grant for Women

Current legislation provides for the Apprenticeship Completion Grant which

is a one-time taxable cash grant of $2,000 to a registered apprentice who

has completed their apprenticeship training and obtains their journeyperson

CPA Canada Federal Budget Commentary 2018 11

certification. The Budget proposes a new Apprenticeship Incentive Grant for

Women. Under this program, women in male-dominated Red Seal trades will

be able to receive $3,000 per year for each of their first two years of training.

Nearly 90 per cent of Red Seal trades would be eligible, according to the Budget

documents. Presumably this grant would be taxable, but this is not clear

from the budget documents.

INTERNATIONAL

Surplus Stripping

Section 212.1 is a provision that is intended to prevent a non-resident (the

transferor) from stripping surplus out of a Canadian resident corporation

(Canco) as a capital gain which might be realized free of Canadian tax rather

than as a dividend that would be subject to Canadian withholding tax. In the

absence of section 212.1, this could be achieved by the transferor by selling the

shares of a Canco with accumulated surplus to another, connected, non-arm’slength

Canco in return for, say, a promissory note or shares with high paid-up

capital (PUC).

A transferor that receives non-share consideration would be deemed by subsection

212.1 to have received a dividend to the extent that the non-share

consideration exceeds the PUC of the transferred shares. If the transferor

receives high PUC shares, the PUC of the shares received would be ground

down to the PUC of the transferred shares.

Section 212.1 is similar to section 84.1 which applies in a purely domestic context,

although section 212.1 applies to any non-resident transferor whereas

section 84.1 applies only to transferors who are individuals.

The Budget proposes to introduce an anti-avoidance measure, effective for

transactions on or after Budget Day, to prevent section 212.1 from being circumvented

by having a partnership or trust own the surplus-laden Canco

shares. The transferor would avoid section 212.1 by selling the partnership or

trust interest rather than the Canco shares.

Foreign Accrual Property Income

In broad terms, foreign accrual property income (FAPI) is passive income

earned by a “foreign affiliate” of a Canadian resident. FAPI is taxed on the

accrual basis to the Canadian shareholder of a “controlled foreign affiliate.” If

earned by a non-controlled foreign affiliate, it is not taxed in Canada on the

accrual basis, but is taxable when repatriated to Canada.

12 CPA Canada Federal Budget Commentary 2018

Foreign-source income that would otherwise be treated as passive would, in

certain circumstances, be considered to be active where the entity earning the

income employs more than five employees (or the equivalent thereof), full-time

in the active conduct of the business.

Taxpayers whose foreign operations would not require more than five employees

could pool their investments with other taxpayers in a similar position in an

entity in which they would hold shares the return on which would be tracked to

their own investments. The pooled entity would require more than five employees

thus converting the income of all the investors to active business income.

The Budget proposes to introduce measures that would prevent the circumvention

of the “more than five employee” rule in this fashion. Each of the

tracked pools would be treated as a separate business that would not employ

more than five employees.

The Budget also proposes to introduce measures that are intended to prevent

the avoidance of controlled foreign affiliate status by the use of tracked

pooling arrangements similar to those described above where the individual

Canadian taxpayer does not participate in a controlling interest in the foreign

affiliate. Under the tracking arrangement each taxpayer retains control over its

contributed assets and any returns from those assets accrue to it benefit. This

proposal would deem a foreign affiliate of a taxpayer in this type of scenario to

be a controlled foreign affiliate.

Regulated foreign financial institutions earning what would otherwise be

FAPI are considered to be earning active business income if, among other

conditions, they meet certain minimum capital requirements. These minimum

requirements have heretofore not applied to trading or dealing in indebtedness.

The Budget proposes to introduce measures that will apply the same

minimum capital requirements to trading or dealing in indebtedness.

All of these measures will apply to taxation years of foreign affiliates that begin

on or after Budget Day.

Reassessments

The Budget proposes to extend the normal four-year reassessment period that

is generally applicable to income arising from a taxpayer’s foreign affiliate by

three years. The extended reassessment period will now coincide with that

available to the CRA in connection with transactions between Canadian residents

and non-arm’s-length non-residents.

This measure will apply to taxation years that begin on or after Budget Day.

CPA Canada Federal Budget Commentary 2018 13

Where a taxpayer has transactions with a non-arm’s length non-resident, because

the normal reassessment period available to the CRA is extended three years,

there are circumstances that can prevent the CRA from reassessing a now

statute-barred earlier year to which a taxpayer has carried back a loss.

The Budget proposes to allow the CRA an additional three years to reduce a

loss carried back to a prior taxation year to the extent that the reassessment

involves the adjustment, in a later year, of the loss carry back.

This measure will apply where the loss is carried back from a taxation year that

ends on or after Budget Day.

Reporting Requirements

The Budget proposes to shorten the filing deadline for the foreign affiliate

information reporting (T1134) from the current 15 months after the Canadian

company’s year-end to six months after the year-end to coincide with the filing

deadline for the corporate tax return (T2).

This proposal applies to taxation years that begin after 2019.

Sharing Information for Criminal Matters

The Budget proposes to allow the legal tools available under the Mutual Legal

Assistance in Criminal Matters Act to be used by CRA in order to facilitate the

sharing of information related to tax offenses under Canada’s tax treaties, tax

information exchange agreements and the Convention on Mutual Administration

Assistance in Tax Matters. In addition, the Budget proposes to enable the

sharing of tax information with Canadian mutual legal assistance partners in

respect of acts that, if committed in Canada, would constitute terrorism, organized

crime, money laundering, criminal proceeds or designated substance

offenses. These proposals will also enable confidential information under Part

IX of the Excise Tax Act and the Excise Act, 2001 to be disclosed to Canadian

police officers in respect of those offenses where such disclosure is currently

permitted under the ITA.

TRUSTS

Reporting Requirements

The Budget proposes extensive new reporting requirements for most family

trusts, effective for returns required to be filed for 2021 and subsequent

taxation years. These requirements could impose an obligation to file a return

14 CPA Canada Federal Budget Commentary 2018

where none currently exists, such as where the trust earned no income in the

year. The trust will be required to report the identity of all trustees, beneficiaries

and settlors of the trust. In addition, the identity of each person who has

the ability to exert control, through the trust terms or a related agreement,

over trustee decisions in respect of the appointment of income or capital must

be disclosed.

The reporting requirements will apply to Canadian-resident express trusts and

to non-resident trusts currently required to file a Canadian return. This would

include most personal “family” trusts used in tax planning. The following trusts

are excluded from the requirements:

• Mutual fund trusts, segregated funds and master trusts

• Trusts governed by registered plans such as RRSPs

• Lawyers’ general trust accounts

• Graduated rate estates (generally the first 36 months of a deceased

individual’s estate)

• Qualified disability trusts

• Trusts that qualify as registered charities or non-profit organizations

• Trusts in existence for less than three months

• Trusts that hold less than $50,000 in assets throughout the year as long as

the assets are deposits, government debt obligations and/or listed securities;

the Budget documents do not indicate if the $50,000 is based on

cost or fair market value

These new reporting requirements are designed to provide better beneficial

ownership information.

The Budget also introduces penalties for failure to file a trust return where the

new reporting requirements apply. The penalty will be $25 per day late with

a minimum of $100 and a maximum of $2,500. If the failure to file is made

knowingly, or as a result of gross negligence, there will be an additional penalty

of five per cent of the maximum fair market value of property held during the

year with a minimum of $2,500.

CHARITIES

Municipalities as Eligible Donees

Where a registered charity’s registration is revoked, either at its request

or because of non-compliance, a revocation tax of 100 per cent of the net

value of the charity’s assets is imposed. This tax can be reduced by making

CPA Canada Federal Budget Commentary 2018 15

qualifying expenditures, including gifts to “eligible donees,” generally another

registered charity where its directors/trustees are arm’s length with those of

the revoked charity.

The Budget proposes to allow transfers of property to municipalities to be

qualified expenditures for this purpose, subject to case-by-case approval, thus

reducing the revocation tax. This measure will apply to transfers made on or

after February 27, 2018.

Universities Outside Canada

Certain categories of “qualified donees,” including universities outside Canada,

are required to register with the CRA and are listed on the CRA website. Foreign

universities are also required to be prescribed in the Income Tax Regulations.

The Budget proposes to eliminate this duplication in respect of universities by

removing the Income Tax Regulation requirement as of February 27, 2018.

SALES TAX AND EXCISE TAX MEASURES

GST/HST and Investment Limited Partnerships

The Budget confirms the Federal Government’s intention to proceed with the

legislative and regulatory proposals released on September 8, 2017, relating to

the application of GST/HST to investment limited partnerships with the following

modifications:

• GST/HST only applies to management and administrative services rendered

by the general partner on or after September 8, 2017, and not before

this date unless the general partner has charged the GST/HST in respect of

such services before that date

• GST/HST will generally be payable on the fair market value of the management

and administrative services in the period in which they are provided

• An investment limited partnership will have the ability to make an election

to advance the application of these rules as of January 1, 2018.

Consultation on the GST/HST Holding Corporation Rules

The government intends to consult on the application of the “holding corporation

rule” that allows a parent corporation to claim input tax credits to recover

GST/HST paid on expenses that can reasonably be regarded as relating to

the ownership of shares or indebtedness of a related commercial operating

corporation.

16 CPA Canada Federal Budget Commentary 2018

The consultations will address the limitation of the rule to corporations and not

other entities and the degree of relationship between the parent corporation

and the commercial operating corporation.

The government intends on clarifying the expenses of the parent corporation

that are in respect of shares or indebtedness of a related commercial operating

corporation that qualify for input tax credits under this rule.

Tobacco Taxation

The Budget proposes to increase the excise duty on tobacco products on an

annual basis rather than to automatically increase it every five years to account

for inflation. These inflationary increases will take effect on April 1 of every

year, starting in 2019. Effective February 28, 2018, tobacco excise duty rates

will be adjusted to account for the inflation since the last adjustment in 2014.

The excise duty rate is proposed to increase by an additional $1 per carton of

200 cigarettes with corresponding increases to the excise duty rates on other

tobacco products.

Cigarette inventories held by manufacturers, importers, wholesalers and retailers

at the end of Budget Day 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.

Cannabis Taxation

The Budget proposes a new excise duty framework for cannabis products to

be introduced as part of the Excise Act, 2001. The duty will generally apply

to all products available for legal purchase including fresh and dried cannabis,

cannabis oils and seeds and seedlings for home cultivation. Cannabis

cultivators and manufacturers (cannabis licensees) will be required to obtain a

cannabis licence from the CRA and remit the applicable excise duty.

Excise duties will apply at the higher of a flat rate on the quantity of cannabis

contained in the final product and a percentage of the dutiable amount as sold

by the producer. Generally, the dutiable amount is the portion of the producer’s

selling price that does not include cannabis duties.

The proposed excise duty will be applied as follows:

• A flat rate duty will be imposed on a dollar-per-gram basis at the time of

packaging for final retail sale. For seed and seedlings, the duty rate will be

applied on a dollar-per-seed/seedling basis.

CPA Canada Federal Budget Commentary 2018 17

• At the time of delivery by a cannabis licensee that packaged the cannabis

product to a purchaser (i.e., a provincially authorized distributor), an ad

valorem rate will also be imposed on the dutiable amount.

• Cannabis licensees will be liable to pay duty at the higher of the flat rate or

the ad valorem rate at the time of delivery to a purchaser.

The framework requires all cannabis products to have an excise stamp before

they can be removed from the premises of a cannabis licensee and enter the

Canadian market for a retail sale. Cannabis licensees who packaged the cannabis

product will have the responsibility to determine and apply the appropriate

excise stamp based on the provincial or territorial market in which the product

is intended to be sold.

The new excise duty would not apply to packaged products that contain concentrations

of no more than 0.3 per cent Tetrahydrocannabinol (THC) and

pharmaceutical products that can only be acquired through a prescription.

The GST/HST rules for basic groceries will be amended to ensure that any

sales of cannabis products will not meet the zero-rating provisions and will be

subject to GST/HST in the same way as sales of other cannabis products. In

addition, the relieving rules for agriculture products will be changed to ensure

that sales of cannabis products including seeds or seedlings will also be subject

to GST/HST.

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