Draft Legislation – Canada Federal Budget 2021
Prepared by Andersen in Canada, Montréal Partner Patrick Coutu and Tax Manager Divya Katyal with support from Inta Simonyan.
On February 4, 2022, the government of Canada released draft legislation for comment, implementing new tax measures including some of those remaining from the 2021 Federal Budget (https://ca.andersen.com/blog/canada-federal-budget-2021-highlights/). Below is an overview of some of the major proposals in this package:
1. Mandatory Disclosure Rules
The package expands the scope of reportable transactions and creates new disclosure requirements for notifiable transactions and uncertain tax positions. These rules will apply from January 1, 2022.
– Reportable Transactions
The proposals considerably lower current thresholds for reportable transactions, increase non‑compliance penalties and accelerate filing deadlines. Furthermore, reporting is now a personal obligation, another person’s reporting of the transaction will no longer discharge the taxpayer from its duties to do the same.
Reportable transactions are transactions that are considered “avoidance transactions” as the term is defined for application of the general anti-avoidance rule and that meet at least two of the following three criteria: the transaction contains a contingent fee arrangement, confidentiality protection or contractual protection.
The proposals would require a transaction to be reported when any one of the three criteria is met. Furthermore, the definition of “avoidance transaction” is amended to include any transaction where it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit.
Failure to report a reportable transaction is sanctioned by considerable penalties for taxpayers, promoters and advisers.
– Notifiable Transactions
The Minister of National Revenue, with agreement from the Minister of Finance, shall now have the power to designate certain transactions or series of transactions as “notifiable transactions” which must be reported by taxpayers, advisers, promoters and certain other types of persons that enter into such transactions.
The following list of sample notifiable transactions has been released by the Department of Finance:
- manipulating Canadian-controlled private corporation status to avoid anti-deferral rules that apply to investment income;
- creating loss straddle transactions using a partnership;
- avoiding the 21-year deemed disposition of trust property;
- manipulating bankruptcy status to reduce a forgiven amount relating to a commercial obligation;
- relying on purpose tests in section 256.1 of the ITA (tax attribute trading restrictions) to avoid a deemed acquisition of control; and
- using back-to-back arrangements to circumvent the thin capitalization rules and Part XIII withholding tax.
Failure to report a notifiable transaction is sanctioned by considerable penalties for taxpayers, promoters and advisers.
– Uncertain Tax Positions
The proposals also require certain corporate taxpayers that have filing requirements in Canada to report their uncertain tax positions as identified according to IFRS. The disclosure mut be filed with the corporation’s annual tax return.
Corporations that have individually at least $50M in assets at the end of the financial year, prepare their financial statements according to IFRS or other local GAAP (or whose consolidated group prepares its financial statements according to these standards), and who have an uncertain tax position reflected in their audited financial statements will be subject to these reporting requirements.
The reporting requirements would apply to transactions entered into after January 1, 2021.
Failure to report an uncertain tax position is sanctioned by considerable penalties for taxpayers, promoters and advisers.
2. Interest and Financing Expenses Deductibility Limits
Adopting an approach consistent with Action 4 of the OECD’s BEPS project, Canada is set to limit interest and financing expense deductions beginning on January 1, 2023 with a transitionary period until January 1, 2024.
The new rules limit interest and other financing fees deductions to a maximum of 40% of tax‑adjusted EBITDA from January 1, 2023 until the end of the year and 30% from January 1, 2024.
These limits can apply to corporate groups and will exist in parallel with current thin-capitalization rules.
It will be possible to carry forward (up to 20 years) or back (up to 3 years) any interest denied under the new rules or to transfer unused interest capacity to other Canadian members of the same multinational group.
It is also possible to carry-back the expense to tax years that precede the new rules (i.e. an expense denied in 2023 can be carried back to 2022, 2021 or 2020).
3. Mutual Fund Trusts
New rules limit deductions from taxable income of the capital gains earned by mutual fund trusts that allocate capital gains income to investors on redemption of units.
Under these new rules, a trust (that issues only ETF units) may deduct from its taxable income the capital gains earned and allocated to investors, limited to total net taxable gains for the year multiplied by a fraction. This fraction is determined by the formula as provided in the provisions.
For a trust that issues both ETF units and non-ETF units, the formula to limit deductions is slightly modified with only the net asset value and net taxable gains related to the ETF portion of the fund being considered. The previous rules remain in place for the non-ETF portion of the mutual fund trust.
4. Audit Powers
In response to a Federal Court of Appeal decision, the proposals expand an auditor’s investigation powers, and powers to compel a person to answer questions and provide assistance to CRA auditors.
Auditors may now compel people other than the taxpayer to answer questions, whether orally or in writing, as well as compelling them to meet with the auditor, either in person or through electronic means of communication.
5. Immediate Expensing for Canadian-Controlled Private Corporations
This temporary measure allows a Canadian-controlled private corporation (“CCPC”) to fully expense eligible capital property, which was acquired on or after April 19, 2021, and became available for use before January 1, 2024.
Up to $1.5M of capital costs per year can be expensed by the CCPC and its associated entities. The deduction is to be taken in the year where the capital property was put into use.
This deduction may not be carried forward or carried back and may not be applied to capital classes 1 to 6, 14.1, 17, 47, 49 and 51.
6. Clean Energy Incentives
Qualifying zero-emissions technology manufacturers will see their tax rates cut in half from January 1, 2022 until December 31, 2029 when the measure will gradually be phased out.
A taxpayer will need to have at least 10% of their gross revenue from all active business carried on in Canada derived from eligible activities to take advantage of the new tax rates.
Clean energy equipment capital classes are expanded: a greater number of clean energy equipment will benefit from accelerated amortization rates of 30% for class 43.1 and 50% for class 43.2.
7. Trust Beneficiary Reporting
From December 30, 2022, trusts residing in Canada will be required to file a trust return (T3) and information return whether the trust has tax payable or not.
The trusts will be required to list each person who at any time in the year was a trustee, beneficiary or settlor, or had the ability to exert control over trustee decisions over the allocation of trust income or capital, and to provide certain personal information about those persons (name, address, date of birth [for individuals], jurisdiction of residence and social insurance number or other applicable taxpayer identification number).
Failure to file such returns will result in new, heavier penalties.
Certain types of trusts are exempt from these requirements
8. Tax Debt Collection
Following recent court decisions, the proposals modify tax collection provisions pertaining to persons who receive property from a non-arm’s length party for less than its fair market value.
Furthermore, new heavy penalties are imposed on a planner that suggests transactions which may lead to a decrease in a person’s liability under these provisions. The new penalties total the lesser of (i) $100,000 plus the planner’s fees; and (ii) 50% of the tax that was attempted to be avoided by the planning.
9. Doctoral Fellowship Income – RRSP
Postdoctoral fellowship income is now included in the “earned income” definition for RRSP purposes, which would allow postdoctoral fellowships to contribute to RRSP from January 2021 and forward.
An election is available for income received after January 1, 2010, but before January 1, 2021.
10. Mining of Cryptocurrency – GST/HST
Cryptocurrency mining will now generally be deemed not to be a supply for GST/HST purposes. Thus, no GST/HST will need to be charged on any mining activities, but input tax credits will not be available for these activities either.
11. Disability Tax Credit Changes
Health conditions that give rise to eligibility for the disability tax credit are expended to include various conditions, notably mental health illnesses.
12. Registered Investment Plans
Penalties are increased for registered plans who hold non-qualified investments to 1% per month (for a maximum of 12% per year) of the fair market value of such non-qualified investments.
13. Film and Video Production Tax Credits
Timelines have been extended to 36 months for both the Canadian Film or Video Production Tax Credit (CPTC) and the Film or Video Production Services Tax Credit (PSTC).