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Canada

21 March 2019

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Canada Federal Budget 2019 Tabled

Canada's Federal Budget 2019 was tabled by Finance Minister Bill Morneau on 19 March 2019. The main business-related tax measures proposed in the Budget are summarized as follows:

Business Investment in Zero-Emission Vehicles

Budget 2019 proposes to provide a temporary enhanced first-year capital cost allowance (CCA) rate of 100% for zero-emission vehicles. A limit of CAD 55,000 (plus sales taxes) on the amount of CCA deductible will apply in respect of each zero-emission passenger vehicle (new Class 54), although the limit does not apply for zero-emission taxi cabs, vehicles acquired for the purpose of short-term renting or leasing, and heavy trucks and tractors designed for hauling freight (new Class 55). The enhanced first-year CCA rate of 100% will apply from 19 March 2019 through 2023, after which it will be reduced to 75% for 2024-2025, 55% for 2026-2027, and will no longer be available from 2028.

Small Business Deduction – Farming and Fishing

Canada provides a reduced corporate rate of 9% on income up to CAD 500,000 under the small business deduction rules, subject to certain limitations, including that a Canadian-controlled private corporation (CCPC) is ineligible in respect of "specified corporate income" that includes income earned by a CCPC from sales to a private corporation in which the CCPC, or certain specified persons, holds a direct or indirect interest. However, an exclusion from this rule applies for certain income of a CCPC's farming or fishing business that arises from sales to a farming or fishing cooperative corporation.

To provide greater flexibility to farming and fishing businesses, Budget 2019 proposes to eliminate the requirement that sales be to a farming or fishing cooperative corporation in order to be excluded from specified corporate income. As such, this exclusion will apply to the income of a CCPC from sales of the farming products or fishing catches of its farming or fishing business to any arm's length purchaser corporation.

This measure will apply to taxation years that begin after 21 March 2016.

Scientific Research and Experimental Development Program

Budget 2019 proposes to repeal the use of taxable income as a factor in determining a CCPC's annual expenditure limit for the purpose of the enhanced Scientific Research and Experimental Development (SR&ED) tax credit. As a result, small CCPCs with taxable capital of up to CAD 10 million will benefit from unreduced access to the enhanced refundable SR&ED credit regardless of their taxable income. As a CCPC's taxable capital begins to exceed CAD 10 million, this access will be gradually reduced.

This measure will apply to taxation years that end on or after 19 March 2019.

Character Conversion Transactions

Budget 2019 proposes an amendment that introduces an additional qualification for the commercial transaction exception in the definition of "derivative forward agreement" as the exception applies to purchase agreements.

Under derivative forward agreement rules, any gain arising from a "derivative forward agreement" is treated as ordinary income rather than as a capital gain to prevent taxpayers from entering into financial arrangements (character conversion transactions) to reduce tax by converting, with the use of derivative contracts, the returns on an investment that would have the character of ordinary income to capital gains, only 50% of which are included in income. The commercial transaction exception provides for an exclusion from this treatment where the economic return from a purchase or sale agreement is based on the economic performance of the actual property being purchased or sold. This is intended to exclude certain commercial transactions (e.g., merger and acquisition transactions) from the scope of the derivative forward agreement rules.

The amendment proposed in Budget 2019 will provide that the commercial transaction exception is unavailable if it can reasonably be considered that one of the main purposes of the series of transactions, of which an agreement to purchase a security in the future (or an equivalent agreement) is part, is for a taxpayer to convert into a capital gain an amount paid on the security, by the issuer of the security, during the period that the security is subject to the agreement.

The measure will apply to transactions entered into on or after 19 March 2019. It will also apply after December 2019 to transactions that were entered into before 19 March 2019 including those that extended or renewed the terms of the agreement on or after 19 March 2019. This grandfathering will incorporate the same growth limits used under the transitional relief provided under the derivative forward agreement rules introduced in 2013 to ensure that no new money flows into grandfathered transactions on or after 19 March 2019.

Transfer Pricing Measures

Budget 2019 proposes two measures concerning the relationship between the transfer pricing rules in Part XVI.1 and other provisions of the Income Tax Act.

Order of Application of the Transfer Pricing Rules

Canada's transfer pricing rules can apply to determine the quantum or nature of amounts relevant to the computation of tax. Other provisions of the Income Tax Act can apply to similar effect. Where both the transfer pricing rules and another provision of the Income Tax Act may apply to the same amount that is relevant to the computation of tax, questions have arisen as to whether adjustments, if any, under the transfer pricing rules are made in priority to the application of the other provision. This may have various implications, including with respect to the calculation of penalties imposed under Part XVI.1.

To provide greater certainty in the application of the income tax rules, Budget 2019 proposes to amend the Income Tax Act to clarify that the transfer pricing rules in Part XVI.1 apply in priority to the application of the provisions in other parts of the Income Tax Act, including the provisions relating to income computation in Part I. The current exceptions to the application of the transfer pricing rules that pertain to situations in which a Canadian resident corporation has an amount owing from, or extends a guarantee in respect of an amount owing by, a controlled foreign affiliate will continue to apply.

This measure will apply to taxation years that begin on or after 19 March 2019.

Applicable Reassessment Period

The transfer pricing rules include an expanded definition of "transaction", which includes an arrangement or event. This allows the transfer pricing rules to apply to the broad range of situations that may arise in the context of a multinational enterprise's operations.

After a taxpayer files an income tax return for a taxation year, the Canada Revenue Agency is required to perform an initial examination of the return and to assess tax payable, if any. The Canada Revenue Agency then normally has a fixed period, generally three or four years, after its initial examination beyond which the Canada Revenue Agency is precluded from reassessing the taxpayer.

An extended three-year reassessment period exists in respect of a reassessment made as a consequence of a transaction involving a taxpayer and a non-resident with whom the taxpayer does not deal at arm's length. This is intended to apply in the transfer pricing context. However, the expanded definition of "transaction" used in the transfer pricing rules does not apply for the purposes of the rule establishing this extended reassessment period.

Budget 2019 proposes to amend the Income Tax Act to provide that the definition "transaction" used in the transfer pricing rules also be used for the purposes of the extended reassessment period relating to transactions involving a taxpayer and a non-resident with whom the taxpayer does not deal at arm's length.

This measure will apply to taxation years for which the normal reassessment period ends on or after 19 March 2019.

Foreign Affiliate Dumping

To better achieve the policy objectives of the foreign affiliate dumping rules, Budget 2019 proposes to extend the application of these rules to corporations resident in Canada that are controlled by:

  • a non-resident individual,
  • a non-resident trust, or
  • a group of persons that do not deal with each other at arm's length, comprising any combination of non-resident corporations, non-resident individuals, and non-resident trusts.

Related persons are considered not to deal with each other at arm's length for income tax purposes. To ensure that a non-resident trust will be considered related to another non-resident person in circumstances similar to where a non-resident corporation would be so related, the proposals include an extended meaning of "related" that applies for the purpose of determining whether a non-resident trust does not deal at arm's length with another non-resident person.

This measure will apply to transactions and events that occur on or after 19 March 2019.

Cross-Border Share Lending Arrangements

Canadian Shares

To better reflect the policy objective that the Canadian dividend withholding tax consequences for a non-resident lender under a share loan should generally be the same as if it had continued to hold the lent share, Budget 2019 proposes an amendment to ensure that a dividend compensation payment made under a securities lending arrangement by a Canadian resident to a non-resident in respect of a Canadian share is always treated as a dividend under the characterization rules and, accordingly, always subject to Canadian dividend withholding tax.

Budget 2019 also proposes an amendment to apply the characterization rules not only to a "securities lending arrangement", as defined under the Income Tax Act, but also to a "specified securities lending arrangement". The definition includes securities loans that are substantially similar to securities lending arrangements.

Finally, Budget 2019 proposes to introduce complementary amendments to ensure that the securities lending arrangement rules cannot be used to obtain other unintended withholding tax benefits. For instance, a rule will be introduced to ensure that the same withholding tax rate under a tax treaty applies to a dividend compensation payment made to a non-resident as to a dividend that would have been paid to that non-resident had it continued to hold the lent Canadian share.

These proposed amendments will apply to compensation payments that are made on or after 19 March 2019 unless the securities loan was in place before 19 March 2019, in which case the amendments will apply to compensation payments that are made after September 2019.

Foreign Shares

To address the issue of existing characterization inappropriately subjecting dividend compensation payments in respect of lent shares issued by non-resident corporations (foreign shares) to Canadian dividend withholding tax, Budget 2019 proposes an amendment to broaden an existing exemption from Canadian dividend withholding tax so that it includes any dividend compensation payment made by a Canadian resident to a non-resident under a securities lending arrangement if:

  • the securities lending arrangement is "fully collateralized"; and
  • the lent security is a foreign share.

This proposed amendment will apply to dividend compensation payments that are made on or after 19 March 2019.

GST/HST Health Measures

Budget 2019 proposes to extend the application of the GST/HST relief (exemption/zero-rating) to certain biologicals, medical devices, and health care services to reflect the evolving nature of the health care sector. This includes relief for the following supplies made after 19 March 2019:

  • Supplies and imports of human ova made imports of human in vitro embryos;
  • Supplies of foot care devices supplied on the order of a podiatrist or chiropodist; and
  • Supplies of multidisciplinary health services rendered by a team of health professionals, such as doctors, physiotherapists and occupational therapists, whose services are GST/HST-exempt when supplied separately.

Cannabis Taxation - New Classes of Cannabis Products

Budget 2019 proposes that edible cannabis, cannabis extracts (including cannabis oils) and cannabis topicals be subject to excise duties imposed on cannabis licensees at a flat rate applied on the quantity of total tetrahydrocannabinol (THC), the primary psychoactive compound in cannabis, contained in a final product. The THC-based duty will be imposed at the time of packaging of a product and become payable when it is delivered to a non-cannabis licensee (e.g., a provincial wholesaler, retailer or individual consumer).

Beneficial Ownership Transparency

Budget 2019 proposes amendments to the Canada Business Corporations Act to make the beneficial ownership information maintained by federally incorporated corporations more readily available to tax authorities and law enforcement.

Previously Announced Measures

Budget 2019 confirms the Government's intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:

  • Income tax measures announced on 21 November 2018 in the Fall Economic Statement to:
    • Provide for the Accelerated Investment Incentive;
    • Allow the full cost of machinery and equipment used in the manufacturing and processing of goods, and the full cost of specified clean energy equipment, to be written off immediately;
    • Extend the 15% mineral exploration tax credit for an additional five years; and
    • Ensure that business income of communal organizations retains its character when it is allocated to members of the communal organization for tax purposes;
  • Regulatory proposals released on 17 September 2018 relating to the taxation of cannabis;
  • Remaining legislative and regulatory proposals released on 27 July 2018 relating to the Goods and Services Tax/Harmonized Sales Tax;
  • The measures referenced in Budget 2018 to support employees who must reimburse a salary overpayment to their employers due to a system, administrative or clerical error;
  • The income tax measures announced in Budget 2018 to implement enhanced reporting requirements for certain trusts to provide additional information on an annual basis;
  • The income tax measure announced in Budget 2018 to facilitate the conversion of Health and Welfare Trusts to Employee Life and Health Trusts;
  • Measures confirmed in Budget 2016 relating to the Goods and Services Tax/Harmonized Sales Tax joint venture election;
  • The income tax measures announced in Budget 2016 expanding tax support for electric vehicle charging stations and electrical energy storage equipment; and
  • The income tax measures announced in Budget 2016 on information-reporting requirements for certain dispositions of an interest in a life insurance policy.

Budget 2019 also reaffirms the Government's commitment to move forward as required with technical amendments to improve the certainty of the tax system.

Click the following link for the Budget 2019 webpage for more information.

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