April 2012 Executive TaxBriefs

The 2012 Federal Budget was delivered by the Finance Minister, Jim Flaherty, on March 29,2012.  The following is a redacted summary of the changes as summarized by KPMG in their 2012 Federal Budgets Highlights newsletter.

A major thrust of the budget this year is innovation with more direct support provided for R&D in Canada and a scaling back of the benefits of the Scientific Research and Experimental Development (SR&ED) tax incentive program.

Also significant in this budget is the move by the government to close what it considers to be tax loopholes, including changes in the personal, corporate, charities and international tax areas.

SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT INITIATIVES TAX MEASURES

• Reduction of general tax credit rate - The general SR&ED investment tax credit rate will be reduced to 15% (from 20%), effective January 1, 2014.
• Capital expenditures -Capital expenditures will be removed from the base of eligible expenditures for expenditures incurred in 2014 and subsequent years. All other expenditures such as salary and wages, materials, overhead expenses and contract payments remain eligible.
• Proxy overhead calculation -The prescribed proxy amount will be reduced to 55% (from 65%) of direct labour costs commencing January 1, 2014.
• Arm's-length contract payments - Only 80% of the contract payments will be used for purposes of

PERSONAL TAX CHANGES

Old Age Security and Guaranteed Income Supplement

Eligibility age

The age of eligibility for Old Age Security (OAS) and Guaranteed Income Supplement (GIS) will be gradually increased from 65 to 67, starting April 2023, with full implementation by January 2029. This measure will not affect anyone who is 54 years of age or older as of March 31, 2012. In particular, individuals born on March 31, 1958 or earlier will not be affected. Individuals born on or after February 1, 1962 will have an age of eligibility of 67. Individuals born between April 1, 1958 and January 31, 1962 will have an age of eligibility between 65 and 67.

Option to defer OAS pension

Starting on July 1, 2013, individuals will be allowed to voluntarily defer their OAS pension, for up to five years. These individuals will then receive a higher actuarially adjusted annual pension.

Group sickness or accident insurance plans

The budget proposes to include the amount of an employer's contributions to a group sickness or accident insurance plan in an employee's income for the year in which the contributions are made to the extent that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis. This measure will not affect the tax treatment of private health services plans or certain other plans.

This measure will apply in respect of employer contributions made on or after March 29, 2012 to the extent the contributions relate to coverage after 2012, except that such contributions made on or after March 29, 2012 and before 2013 will be included in the employee's income for 2013.

Retirement compensation arrangements

Proposed new prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arm's length transactions. These rules will be based very closely on existing rules for Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs). As well, the budget proposes a new restriction on RCA tax refunds in circumstances where RCA property has lost value.

The prohibited investment rules will apply for investments acquired or investments that become prohibited investments on or after March 29, 2012. The advantage rules will apply to advantages extended, received or receivable on or after March 29, 2012, including RCA advantages that related to RCA property acquired, or transactions occurring, before March 29, 2012. Transitional rules will apply.

The budget proposes that, if RCA property has declined in value, the RCA tax will be refunded only in circumstances where the decline in value of the property is not reasonably attributable to prohibited investments or advantages, unless the CRA is satisfied that it is just and equitable to refund the tax. This measure will apply in respect of RCA tax on RCA contributions made on or after March 29, 2012.

Employees Profit Sharing Plans

The budget proposes a measure to limit certain employer contributions to Employees Profit Sharing Plans (EPSPs). The proposal introduces a special tax payable by a specified employee on an "excess EPSP amount".

A specified employee is one who has significant equity interest in the employer or who does not deal at arm's length with the employer. An "excess EPSP amount" will be the portion of an employer's EPSP contribution, allocated by the plan trustee to a specified employee, that exceeds 20% of the specified employee's salary received in the year from the employer.

The special tax will include two components: the first component will be equal to the top federal marginal tax rate of 29%. The second component will be equal to the top marginal rate of the province of the specified employee's residence (unless the specified employee resides in Quebec, in which case this component will be zero). A new deduction will be introduced to ensure that an excess EPSP amount is not also subject to regular income tax. A specified employee will not be able to claim any other deductions or credits in respect of an excess EPSP amount.

The CRA will have the discretion to waive or cancel the application of this measure if it considers it just and equitable to do so.

This measure will apply to EPSP contributions made by an employer on or after March 29, 2012, other than contributions made before 2013 under a legally binding obligation arising under a written agreement entered into before March 29, 2012.

Mineral Exploration Tax Credit

The Mineral Exploration Tax Credit is available to individuals who invest in flow-through shares. The credit is equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. The budget proposes to extend eligibility for the tax credit for one year to flow-through share agreements entered into on or before March 31, 2013.

OTHER PERSONAL TAX MEASURES

Medical Expense Tax Credit

Expenses eligible for the Medical Expense Tax Credit will include blood coagulation monitors for use by individuals who require anti-coagulation therapy, including certain associated items, when they are prescribed by a medical practitioner. This measure will apply to expenses incurred after 2011.

Life insurance policy exemption test

The budget proposes to implement several changes regarding the life insurance policy exemption test which is the test that determines whether a life insurance policy is a tax-exempt policy.

The Investment Income Tax (IIT) on life insurance will be modified where appropriate to neutralize impacts of the proposed technical improvements to the IIT base. The government will consult with key stakeholders on these proposed improvements. Amendments to the tax provisions arising from these consultations will apply to life insurance policies issued after 2013.

Overseas Employment Tax Credit

Currently, employees who are residents of Canada and who qualify for the Overseas Employment Tax Credit (OETC) are entitled to a tax credit equal to the federal tax otherwise payable on 80% of their qualifying foreign employment income, up to a maximum foreign employment income of $100,000.

The budget proposes to phase out the OETC over four years, beginning with 2013. In particular, during the phase-out period, the 80% applied to an employee's qualifying foreign employment income will be reduced as follows:

• 60% for 2013
• 40% for 2014
• 20% for 2015.

The OETC will be eliminated for 2016 and subsequent years.

The phase-out rules will not apply to qualifying foreign employment income earned by an employee if the employer has committed in writing (e.g., the employer tendered an irrevocable bid in writing for a project) before March 29, 2012. In this case, the 80% will apply for 2013, 2014, and 2015. However, the OETC will be eliminated for 2016 and subsequent years.

Registered Disability Savings Plans

The budget proposes several measures related to registered disability savings plans (RDSPs), including:

Plan holders

Certain family members (spouse, common-law spouse, common-law partner, or parent of the disabled individual) may, on a temporary basis, become plan holders of a registered disability savings plans (RDSPs) for an adult individual who might not be able to enter into a contract. Currently, a plan holder must be either the beneficiary or their guardian or legal representative. This measure applies from the date of Royal Assent of the enacting legislation until the end of 2016.

Proportional repayment rule

Under current rules, Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) paid into an RDSP in the preceding 10 years must be repaid to the government under certain conditions (the "10-year repayment rule"), including when an amount is withdrawn from an RDSP. The budget proposes to introduce a proportional repayment rule that will apply when a withdrawal is made from an RDSP. Generally, for each $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal must be repaid.

Maximum and minimum withdrawals

The budget proposes changes to the maximum and minimum withdrawals from RDSPs. These changes will apply after 2013.

Rollover of RESP investment income

The budget proposes to allow investment income earned in a Registered Education Savings Plan (RESP) to be transferred on a tax-free (or "rollover") basis to an RDSP if the plans share a common beneficiary, if certain conditions are met. This measure will apply to rollovers of RESP investment income made after 2013.

Termination of RDSP following cessation of eligibility for the disability tax credit

The budget proposes to extend the period for which an RDSP may remain open when a beneficiary becomes disability tax credit-ineligible, i.e., the beneficiary's condition improves so that he or she becomes ineligible for the disability tax credit (DTC).

To have this measure apply, the plan holder is required to make an election in prescribed form on or before December 31st of the year following the first full calendar year for which the beneficiary is DTC-ineligible. The election will generally be valid until the end of the fourth calendar year following the first full calendar year for which a beneficiary is DTC-ineligible.

This measure will apply to elections made after 2013.

Administrative changes

The budget replaces certain deadlines regarding the administration of an RDSP with a requirement that an RDSP issuer act "without delay" in notifying Human Resources and Skills Development Canada when an RDSP is established or transferred from one RDSP issuer to another.

BUSINESS TAX CHANGES

Eligible dividend designations

The budget proposes to allow a corporation to designate, at the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend. The portion of the taxable dividend that is designated to be an eligible dividend will qualify for the enhanced dividend tax credit for eligible dividends and the remaining portion will qualify for the dividend tax credit for non-eligible dividends.

Under the budget proposal, the CRA will be allowed to accept a late designation of an eligible dividend if the corporation makes the late designation within the three-year period following the day on which the designation was first required to be made.

These measures will apply to taxable dividends paid on or after March 29, 2012.

Tax avoidance using partnerships

Elimitation of section 88 "bump" to partnership interests

The budget proposes changes to limit the application of the section 88 "bump" in the wind-up involving a partnership interest where all the fair market value of the partnership interest is derived from income assets.

Section 88 of the Income Tax Act (the Act) generally permits a taxable Canadian corporation that has acquired control of another taxable Canadian corporation to increase the cost base of certain capital assets acquired by the parent company on a wind-up or vertical amalgamation with the parent. The bump permits the parent to add the amount paid for the shares to the cost of certain assets acquired on the amalgamation or wind-up, within certain limits.

The bump applies to capital assets, such as land, shares of a corporation or interest in a partnership but does not apply to income producing assets such as eligible capital property, depreciable property, inventory and resource property.

The budget proposes to deny a bump in respect of a partnership interest to the extent that the accrued gain in respect of the partnership interest is reasonably attributable to the amount by which the fair market value of income assets exceed their cost amount.

These rules apply to income assets that are held directly by the partnership or indirectly through another partnership. However, assets directly owned by a taxable Canadian corporation, shares of which are owned by the partnership, will not be considered to be indirectly held by the partnership.

This measure will apply to amalgamations that occur, and wind-ups that begin, on or after March 29, 2012. However, the new measure will not apply where a taxable Canadian corporation amalgamates with its subsidiary before 2013, or begins to wind up its subsidiary before 2012, provided that before March 29, 2012 the corporation had acquired control or was obligated, as evidenced in writing, to acquire control of the subsidiary and the corporation had the intention, as evidenced in writing, to amalgamate with or wind up with the subsidiary.

Partnership disposition to a non-resident

Section 100 of the Act provides that income assets held by a partnership are fully taxable on the sale of the partnership to a tax-exempt person.

The budget proposes to apply section 100 to the sale of a partnership interest to a non-resident person or to an indirect transfer to a non-resident person or a tax-exempt entity. However, this proposal will not apply to the disposition of an interest to a non-resident person if the partnership, immediately before and immediately after the acquisition by the non-resident person, uses all of the property of the partnership in carrying on business through a permanent establishment in Canada.

This measure applies to dispositions of interests in partnerships that occur on or after March 29, 2012, except for arm's-length dispositions made before 2013 where the taxpayer is obligated pursuant to a written agreement entered into before March 29, 2012.

Partnership waivers

The CRA may not, for a fiscal period of a partnership, make a determination or redetermination of any income, loss, deduction or other amount in respect of the partnership if more than three years have elapsed since the latter of the filings deadline for filing the relevant information return and the day that it is actually filed. However, where a waiver is obtained by the CRA, the period of time for making the determination or redetermination is extended.

The budget proposes that a waiver may be made by one member of the partnership if the member is designated on behalf of all of the partners.

ACCELERATED CCA FOR CLEAN ENERGY GENERATION EQUIPMENT

Waste-fuelled thermal energy equipment

Class 43.2 provides accelerated CCA (50% per year on a declining balance basis) for investment in specified clean energy generation and conservation equipment. Currently, this class includes waste-fuelled thermal energy equipment, subject to the requirement that the heat energy generated from the equipment is used in an industrial process or a greenhouse.  The budget proposes to expand Class 43.2 by removing this requirement.  As a result, waste-fuelled thermal energy equipment will be able to be used in a wide range of applications, including space and water heating.

District energy system equipment

Certain equipment that is part of a district energy system is currently included in Class 43.1 or Class 43.2. The budget proposes to expand Class 43.2 by adding equipment that is part of a district energy system that distributes thermal energy primarily generated by waste-fuelled thermal energy equipment (that is itself eligible for inclusion in Class 43.2).

Energy generation from residue of plants

Currently, subject to certain requirements, equipment that uses plant residues to produce biogas or bio-oil is currently eligible for inclusion in Class 43.2.  The budget proposes to add the residue of plants to the list of eligible waste fuels that can be used in waste-fuelled thermal energy equipment included in Class 43.2 or a cogeneration system included in Class 43.1 or Class 43.2.

Environmental compliance

The budget proposes that equipment using eligible waste fuels not be eligible under Class 43.1 or Class 43.2 if environmental laws and regulations are not complied with at the time the equipment first becomes available for use.

These measures apply to assets acquired on or after March 29, 2012 that have not been used or acquired for use before this date.

Corporate Mineral Exploration and Development Tax Credit

The budget proposes to phase out the corporate tax credit for pre-production mining expenditures. Currently, a tax credit of 10% is available.  The credit will apply at a rate of 10% for exploration expenses incurred in 2012, and at a rate of 5% for expenses incurred in 2013.  The credit will not be available for exploration expenses incurred after 2013.

The corporate tax credit will apply at a rate of 10% for pre-production development expenses incurred before 2014, at a rate of 7% for expenses incurred in 2014, and a rate of 4% for expenses incurred in 2015. The credit will not be available for pre-production development expenses incurred after 2015. However, transitional relief is provided in certain circumstances.

ATLANTIC INVESTMENT TAX CREDIT (AITC)

Oil and gas and mining activities

The budget proposes to phase out the 10% AITC for oil and gas and mining activities over a four-year period.  The AITC will apply at a rate of 10% for assets acquired before 2014 for use in certain oil and gas and mining activities (a list of activities is provided in the budget document), at a rate of 5% for such assets acquired in 2014 and 2015. The AITC will not be available for such assets acquired after 2015.  However, transitional relief is provided in certain circumstances.

Electricity generation equipment

Certain equipment is eligible for the AITC if the equipment is "qualified property". The budget proposes amendments so that qualified property will include certain electricity generation equipment and clean energy generation equipment used primarily in an eligible activity. In general, and subject to certain requirements, qualified property will include electricity generation equipment described in Class 17 or 48 and clean energy generation and conservation equipment described in Class 43.1 or 43.2.

This measure will apply to assets acquired on or after March 29, 2012 that have not been used or acquired for use before this date, except that the measure will not apply to acquisitions of assets that are used primarily in oil and gas or mining activities.

Hiring credit for small business

Last year's budget introduced a temporary Hiring Credit for Small Business of up to $1,000 per employer. The 2012 budget proposes to extend this temporary credit for one year. In particular, a credit of up to $1,000 against a small employer's increase in its 2012 Employment Insurance premiums over those paid in 2011 will be provided.

Taxation of corporate groups

In the 2010 federal budget, the government announced that it was going to explore whether new rules for the taxation of corporate groups, including tax loss consolidation or loss transfer rules, should be considered to improve the functioning of the corporate tax system. Public consultations were held between November 2010 and April 2011 and the government has indicated that discussions with applicable stakeholders, including the provinces and territories, are ongoing.

INTERNATIONAL TAX CHANGES

Thin capitalization rules

The budget proposes a series of measures that impact the thin capitalization rules.

Reduction of debt-to-equity ratio from 2:1 to 1.5:1

The thin capitalization rules limit the interest expense deduction of a Canadian resident corporation where the amount of debt owing to certain non-residents exceeds a 2:1 debt-to-equity ratio. These rules apply to debts owing to a specified shareholder that is not resident in Canada and any other non-resident who does not deal at arm's length with the non-resident. A specified shareholder is generally viewed as owning shares representing more than 25% of the votes or value of the corporation.

The budget proposes that the debt-to-equity ratio be reduced to 1.5:1 for all corporate taxation years that begin after 2012.

Inclusion of partnership debt in the debt-to-equity ratio

Currently, the thin capitalization rules only apply to Canadian resident corporations. The budget proposes to extend these rules to apply to debts owed by partnerships of which a Canadian resident corporation is a member.

In this situation, the debt of the partnership will be allocated to its Canadian resident corporation members based on their proportionate interest in the partnership. These debts will then be included in the corporation's debt-to-equity ratio under the thin capitalization rules.

Where this calculation results in an amount of non-deductible interest that is related to the debt allocated from the partnership, an amount equal to the interest on the portion of the allocated partnership debt that exceeds the permitted debt-to equity ratio will be required to be included in computing the income of the Canadian resident corporation that is a member of the partnership. The inclusion will be treated as either business or property income and the source of this inclusion will be determined by reference to the source against which the interest is deductible at the partnership level.

This measure is applicable in respect of debts of a partnership that are outstanding during corporate taxation years that begin on or after March 29, 2012.

Interest disallowed in the debt-to-equity ratio treated as dividends

The budget proposes to recharacterize the disallowed interest expense from the application of the thin capitalization rules as a dividend for non-resident withholding tax purposes. This recharacterization includes an amount that is required to be included in computing the income of a corporation in respect of a disallowed interest expense of a partnership.

The budget proposes that any disallowed interest expense of a corporation will be allocated to specified non-residents in proportion to the corporation's debt owing in the taxation year to all specified non-residents, including debts owing by the partnerships of which a corporation is a member. Withholding tax will then apply to the deemed dividend allocation. Withholding taxes on deemed dividends are due when applicable withholding taxes on interest payments are otherwise due. The corporation may allocate the disallowed interest expense to the latest interest payments made to any particular specified non-resident in the taxation year. Where the interest expense has not been paid by the end of the taxation year, the disallowed interest expense will be deemed to have been paid as a dividend to that specified non-resident at the end of the taxation year.

This measure applies to taxation years that end on or after March 29, 2012.

Foreign affiliate loans

The budget proposes that the thin capitalization rules will not include the interest expense of a Canadian-resident corporation that relates to interest that is taxable to the Canadian resident corporation as Foreign Accrual Property Income of a controlled foreign affiliate of the corporation.

This measure applies to taxation years of a Canadian resident corporation that end on or after March 29, 2012.

Foreign affiliate dumping

"Foreign affiliate dumping" is a term applied to certain transactions whereby a Canadian subsidiary uses borrowed funds to acquire shares of a foreign affiliate from its foreign parent, obtains an interest expense deduction in Canada on the borrowing and at the same time is eligible to receive exempt surplus dividends on the shares of the foreign affiliate that are exempt from taxation in Canada.

Certain transactions that could also be viewed as foreign affiliate dumping include:

• Acquisitions of shares of a foreign affiliate that are made with internal funds of a Canadian subsidiary, which are viewed as an extraction of funds from the Canadian subsidiary free of Canadian withholding tax
• Acquisitions of newly issued shares of a foreign affiliate where previously issues shares of the foreign affiliate are owned by the foreign parent or another non-resident member of the same corporate group
• Acquisitions of foreign affiliate shares from a foreign subsidiary of the foreign parent
• Acquisitions of foreign affiliate shares from an arm's-length party at the request of the foreign parent.

The budget proposes the following:

• Where certain conditions are met, a dividend will be deemed to be paid by a Canadian subsidiary to its foreign parent to the extent of the value of consideration given by the Canadian subsidiary for the acquisition of the shares of the foreign affiliate. Any deemed dividend will be subject to non-resident withholding tax.
• Furthermore, it is proposed that paid-up capital of any shares of the Canadian subsidiary that are given as consideration by the parent will be disregarded.

These rules will not apply to transactions that meet a "business purpose test". The factors to be considered in applying this test will be non-tax factors and are intended to assist in determining whether it is reasonable to conclude that the investment in, and ownership of, the foreign affiliate belongs in the Canadian subsidiary more than in any entity in the foreign parent's group. The government will receive submissions concerning the details of the proposed "business purpose test" before June 1, 2012.

This measure will apply to transactions that occur on or after March 29, 2012, other than transactions that occur before 2013 between parties that deal at arm's length and that are obligated to complete the transaction pursuant to a written agreement entered into before March 29, 2012.

Related paid-up capital suppression rules will apply in corporate immigrations and emigrations.

The budget indicates that the government intends to monitor further developments in this area.

Base erosion test-Canadian banks

The budget proposes that amendments will be developed on the so-called "Base Erosion Test" of the foreign accrual property income regime as it applies to Canadian banks. Specifically, amendments will be developed to alleviate the tax cost to Canadian banks of using excess liquidity of their foreign affiliates in their Canadian operations. Also, amendments will be developed to ensure that certain transactions that form part of a bank's business of facilitating trades for arm's-length customers are not caught by the base erosion test.

These amendments will be developed with industry representatives.

Transfer pricing adjustments

The transfer pricing rules that generally govern the transactions or series of transactions between parties who do not deal at arm's length are provided in section 247 of the Act.

Once an adjustment to the transfer price is made for income tax purposes by the CRA to reflect arm's-length terms and conditions (commonly referred to as a "primary adjustment"), a resulting adjustment is generally required to account for the part of the transaction which was not deemed to made at acceptable transfer pricing terms.  This part of the transaction is generally referred to as the "secondary adjustment" and is viewed as a benefit conferred on the non-residents participating in the transaction.

It is proposed that section 247 of the Act be amended to confirm that the secondary adjustment be treated as a dividend for purposes of non-resident withholding tax Part XIII of the Act, with the result that related withholding tax will apply. Further, when such an adjustment is applicable, the Canadian corporation subject to the primary adjustment will be deemed to have paid a dividend to each non-arm's length non-resident that is part of the transactions in proportion to the amount of the primary adjustment that relates to that non-resident. This rule specifically applies regardless of whether the non-resident person is a shareholder of the Canadian corporation.

If a non-resident repatriates to the Canadian corporation an amount equal to its portion of the primary adjustment, and if the repatriation is made with the concurrence of the CRA, no deemed dividend will arise if the non-resident is a controlled foreign affiliate of the Canadian corporation.

These proposals will apply to transactions and series of transactions that occur on or after March 29, 2012.

Notice of Ways and Means Motion

For details of the Ontario budget announced on March 27, 2012 see the link to the website for the Province of Ontairo or the commentaries found at one of the Public Audit firm  websites under the heading "2012 Budget Commentaries" below.  Deloitte has also prepared a short summary in their Canadian Tax Alert bulletin.

Ontario Budget

For details of the Quebec 2012 budget announced on March 20, 2012 see the link to the website for the Province of Quebec or the commentaries found at one of the Public Audit firm  websites under the heading "2012 Budget Commentaries" below.  Deloitte has also prepared a short summary in their Canadian Tax Alert bulletin.

Quebec Budget

For details of the Saskatchewan budget announced on March 21, 2012 see the link to the website for the Province of Saskatchewan or the commentaries found at one of the Public Audit firm  websites under the heading "2012 Budget Commentaries" below.  Deloitte has also prepared a short summary in their Canadian Tax Alert bulletin.

Saskatchewan Budget

For details of the Yukon budget announced on March 15, 2012 see the link to the website for the Province of Yukon or the commentaries found at one of the Public Audit firm  websites under the heading "2012 Budget Commentaries" below.

Yukon Budget

For details of the New Brunswick budget announced on March 27, 2012 see the link to the website for the Province of Saskatchewan or the commentaries found at one of the Public Audit firm  websites under the heading "2012 Budget Commentaries" below.  Deloitte has also prepared a short summary in their Canadian Tax Alert bulletin.

New Brunswick Budget

For the Status of International Tax Treaty Negotiations on the Department of Finance website, scroll down past the yearly Notices to see the: In Force; Signed but Not Yet In Force and Under negotiation/re-negotiation details. Also included in this section of the Department of Finance website is an update on TIEA's.  New this month:

• Second Protocol Signed Between Canada and Austria
• Entry Into Force of Updated Tax Treaties with Italy and Switzerland 

Current as of March 30, 2012

Jurisdiction - Date

Federal - March 29, 2012
Alberta - February 9, 2012
British Columbia - February 21, 2012
Manitoba - April 17, 2012
New Brunswick - March 27, 2012
Newfoundland & Labrador - To be announced
Northwest Territories - To be announced
Nova Scotia - April 3, 2012
Nunavut - February 22, 2012
Ontario - March 27, 2012
Prince Edward Island - To be announced
Quebec - March 20, 2012
Saskatchewan - March 21, 2012
Yukon - March 15, 2012

This section of the Department of Finance Website lists the pending, draft tax legislation.  If you are looking for some explanatory notes or the proposed technical language, this is where you will find it.  If you want to know the status of the legislation as it progresses though Parliament to Proclaimed into Force status please see the links under the "Federal Statutory Updates" section below.  For additional details on tax legislation try contacting the Finance official responsible for the particular piece of legislation.  Typically each piece of Draft Legislation provides the name of the responsible official and their contact number.

For information on the 2012 Budgets see the following sites:

PricewaterhouseCoopers       

Deloitte

BDO

For information on tax rates see:     

CRA - Individual rates and corporate rates

PwC - Combined Tax Rates link

BDO - Tax Rates and Figures link

Deloitte - Personal and Corporate Tax Rates link 

Ernst & Young - Personal Tax Calculator and Corporate Tax Rates link

KPMG - Corporate Tax Rates link, Personal Tax Rates link; Tax Facts link

TI2011-0401821C6 - 2011/06/03

In this TI, CRA is asked to provide comments on the obligations of a legal representative of a corporation or a trust where the corporation or the trust is wound up subsequent to legislation being tabled but prior to the enactment of the legislation. In the fact scenario proposed by the taxpayer, the legislation has retroactive provisions, and the corporation or trust had filed their income tax returns based on the then existing legislation rather than the proposed legislation.

As we are aware, although there is no legal requirement to do so, CRA adopts the practice of asking taxpayers to file on the basis of proposed legislation. Filing in such a manner is intended to ease the compliance burden on the taxpayer and the administrative burden on CRA. Should a taxpayer file on the basis of existing legislation, the taxpayer would have to amend the tax returns when the legislation is enacted and incur interest on any additional tax.

In the fact scenario, although the legislation is tabled, the corporation or trust files based on the existing legislation rather than the proposed legislation. The corporation or trust subsequently winds-up, with the assets of the corporation or trust distributed to the shareholders or beneficiaries. Subsequent to the winding-up of the corporation or trust, the proposed legislation is proclaimed, and because of its retroactive provisions, creates a tax liability for the now wound-up corporation or trust. As the funds and assets of the corporation or trust were distributed in the course of the wind-up, there are no funds to pay for the tax liability. Hence, the question arises: will the legal representative be held liable for the tax liability?

CRA references s.159(3), which holds the legal representative personally liable for amounts the corporation or trust is liable to pay under the Tax Act, to the extent of the value of the assets distributed (and under the possession and control of the legal representative) from the corporation or the trust. An exception to this liability is to obtain, prior to the distribution, a clearance certificate under s.159(2).

CRA provides comments on the validity of retroactive legislation, when the tax liability results, and the issuing of a notice of reassessment subsequent to the wind-up of a corporation or a trust.

In answering what is the post wind-up obligation, CRA states:

In summary, where notice is given of proposed legislation having a retroactive effect date, and a legal representative:

(a) does not file in accordance with the proposed legislation;

(b) does not obtain a clearance certificate; and

(c) distributes the property of the taxpayer in the possession or control of the legal representative,

the provisions of subsection 159(3) apply.

CRA concludes that the legal representative would be personally liable for the additional tax liability of the corporation or the trust that arose from the enactment of the proposed legislation if all three of the above listed conditions are satisfied.

As we have said many times before, make sure you get that clearance certificate if you are incontrol of assets that are to be distriubed to shareholders or beneficiaries.  It should also be obvios from the views of CRA that you should not make final distributions while there is pending legislation that could affect the entity wishing to make such a distribution.

TI2011-0407051E5 - 2012/02/14 - Business and Trusts Division of the Rulings Directorate

In this TI, the taxpayer attempts to obtain a better understanding of CRA's position on when rental income may be income from an active business for the purposes of the small business deduction ("SBD"). To gage their position, the taxpayer presented a number of fact scenarios for CRA to comment on.

The definition of "income of the corporation for the year from an active business" can be found in s.125(7). It would include income from an active business and any income "pertaining to" or "incident to" that active business. Neither the terms "pertaining to" nor "incident to" are defined by the Act. CRA provides their interpretation of the terms in IT-73R6 stating:

"In examining the ordinary dictionary meaning of these words, "incident to" generally includes anything that is connected with or related to another thing, though not inseparably, or something that is dependent on or subordinate to another more important thing. "Pertains to" generally includes anything that forms part of, belongs to or relates to another thing. The courts have found that, in interpreting the meaning of "pertains to" or "incident to" in context, there has to be a financial relationship of dependence of some substance between the property in question and the active business before the property is considered to be incident to or to pertain to the active business carried on by the corporation."

In assessing the fact scenarios, CRA concluded that the rental income from three of the fact scenarios did not qualify for the SBD. No details of their analysis were provided, but CRA concluded that for those fact scenarios, the corporations received income from property "that is not connected with the active business". In the fact scenario where a corporation had extra parking spaces and rented a portion of its parking lot to a neighbouring business, CRA concluded that the rental income may be active business income and qualify for the SBD, the reasoning being that "the parking lot is connected to and inseparable from the building where the corporation is carrying on an active business".

Although some insight is obtained from these conclusions, what may best be drawn from the conclusions is that taxpayers should not hope for a liberal interpretation or application by CRA of the terms "pertaining to" or "incident to".

It should be noted that CRA stated that the properties in the fact scenarios were "not listed for sale and there is no indication that the rented property will be required by the active business in the future". These are factors that, because of the temporary nature of the rentals, may hint at active business income.

In the remaining fact scenario, CRA concluded that the rental income was active business income. This conclusion was not reached on an analysis of whether the income was "pertaining to" or "incident to" an active business, but rather on the provisions of s.129(6), which deems investment income received from an associated corporation to be active business income where the amount is deductible in determining the associated company's income from an active business.

TI2011-0429101C6 - 2011/06/03

In this TI, CRA is asked to provide comments on tax related questions pertaining to insolvent estates. While the taxpayer posed a number of questions, the one of more interest is the question on whether the executor of an estate can use estate assets to object to an income tax assessment.

In responding, CRA referenced s.159(3) and stated that a legal representative is personally liable for amounts the taxpayer is liable for under the Act, to the extent of the value of the assets distributed. They state that an estate is required to pay any tax liability before assets can be distributed, although an allowance can be made for the payment of "reasonable funeral, testamentary and administration costs".

CRA lists the following options in the context of funding an objection by the estate to an income tax assessment:

1. the estate could make an assignment into bankruptcy, in which case the trustee in bankruptcy would make the decision as to whether an objection or appeal should be pursued;
2. the executor could personally fund the services of an accountant and in the event that there is a decrease in tax payable, consideration could be given to permitting the fees to be paid out of the assets of the estate; or
3. the executor could use estate assets to fund the services of an accountant, but would do so at the risk of being held liable under subsection 159(3).

From the options listed, it appears that CRA does not consider the cost of objecting to an income tax assessment as a "reasonable funeral, testamentary and administration cost". This would be a moot point where a clearance certificate is obtained prior to a distribution under s.159(2). However, a question arises whether there is a disconnect between what may be legitimate expenses that are deductible to the estate for the purpose of Part I tax (expenses for objection or appeal - s.60(o)) and the "reasonable funeral, testamentary and administration costs" for the purpose of s.159(3).

If an executor in the normal course of administering an estate first puts the estate in order by pursuing a tax appeal, and then requests a clearance certificate at the point when the assets are ready to be distributed to the beneficiaries, CRA seems to suggest that the executoris too late.  CRA appears to be of the view that the executor has made distributions in the form of the payment legal fees incurred to pursue such appeal and if there are insuffient assets in the estate to meet the tax liabilties, in the event of a failed tax appeal, the executor could be held liable under s.159(3). 

It is suggested that this would be a perverse interpretation by CRA and in fact the executor as trustee of the estate may have a fiduciary duty to the beneficiaries to pursue all available rememdies.  The fact that there may be insufficient funds in the estate to pay taxes presents a bit of a conundrum for both CRA and the exxecutor.  Be careful if you find yourself in this position as an executor and make sure you have the beneficiaries sign off beofore proceding with the tax appeal.

TI2011-0418291E5 - 2012/01/04 - Income Tax Rulings Directorate

This TI is a good reminder of the attribution rules between spouses. In the fact scenario, a number of properties owned by spouses were transferred as part of a divorce. CRA provided its comments on the attribution rules as they apply to a transfer of property.

Capital property can be transferred between spouses on a rollover basis under s.73(1). Although the property is transferred at tax cost with no capital gain being triggered, the attribution rules may apply to any subsequent income or capital gain earned or realized from the property. Whether the attribution rules apply depends on the marital status of the individuals.

We are familiar with the attribution rules as they apply to individuals who are spouses to one another and to individuals who are divorced from one another. Where the transfers of property involve individuals who are spouses, s.74.1(1) and s.74.2 deems income and taxable capital gains to be the income or taxable capital gains of the transferor and not the recipient. Where the transfers of property involve individuals who are divorced, s.74.1(1) and s.74.2 does not apply.

However, there is a less familiar provision that applies to individuals who are spouses, but are living separate and apart because of a breakdown of their marriage. These exceptions to s.74.1(1) and s.74.2 can be found in s.74.5(3). When spouses are living separate and apart, s.74.1(1) does not apply. Similar to s.74.1(1), s.74.2 will also not apply, but unlike s.74.1(1), for s.74.2 not to apply, an election must be filed.

So when assessing whether the attribution rules apply between individuals, don't forget the third marital status - living separate and apart.

NOTE: Technical Interpretations ("TIs") are not published on CRA's website although inquiries regarding such items may be made directly to the Rulings Directorate in Ottawa at their general number (613) 957-8953, by facsimile at (613) 957-2088 or by e-mail: mailto:itrulingsdirectorate@cra-arc-gc.ca.

It is also useful to note that CRA maintains reading rooms across Canada where their internal policies set out in their Taxation Operations Manuals, amongst other publications, may be reviewed - see link: http://infosource.gc.ca/inst/nar/fed11-eng.asp

For more information check the specific guide or go to our link below for new releases.  Numerous forms were updated this month, some of which are linked here and the full list can be found at Recently Added Forms and Publications under: What's New on the CRA website.  Some of the more interesting releases in this category over the past month include:

• T4013 - T3 Trust Guide - 2011
• RC343 - Worksheet - TFSA contribution room
• NR5 - Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to be Withheld
• Tax Tip - Credits and Benefits for Seniors
• GST10 - Application or Revocation of the Authorization to File Separate GST/HST Returns and Rebate Application for Branches or Divisions
• T4060 - Canada Revenue Agency's Collections Policies - Individual Income Tax (T1)
• NOTICE272 - Harmonized Sales Tax - Proposed Enhancements to the British Columbia New Housing Rebates and New Residential Rental Property Rebates
• NR7-R - Application for Refund of Non-Resident Part XIII Tax Withheld
• GST191 - GST/HST New Housing Rebate Application for Owner-Built Houses
• RC4028 - GST/HST New Housing Rebate - Includes Forms GST190, GST191, GST191-WS, GST515 and RC7190-WS

From CRA's Newsroom a Tax Tip on Benefits for students. While this is not particularly earth shattering news, if you have clients who have kids in university it might be a good little reminder to send to them.

The topics covered include:

• Goods and services tax / harmonized sales tax (GST/HST) credit
• Moving expenses
• scholarships, fellowships, bursaries, certain prizes, and research grants
• Child care expenses
• Education amount
• Textbook amount
• Tuition fees
• Student loan interest
• Public transit tax credit

Each of these topics is linked to additional information making it quite easy to acces the information your client's students will require.  In this area of simplifying access to tax information, CRA gets a five star rating.

Covered in our March 2012 newsletter (item 10) CRA's page on How the new Canada-Italy Income Tax Convention affects the taxation of pension payments and social security benefits received has been revised March 9, 2012.

Overdue taxes 5% - Overpaid taxes/non-corporate 3% - Benefits and overpaid corporate taxes 1%

See link for these and other rates – link

For Prior periods - link

For various CRA pages on GST/HST see:

General

Registration

Rulings and Interpretations

GST/HST Status of Vendor

for the new Ontario                      

and BC HST including Referendum results and additional information

Douglas (2012 TCC 73) is a decision of  Woods J. dealing with whether a due diligence defence was available to a taxpayer who prepared his own return for 2008 and knowingly did not file it, or include a form T1135, until March, 2010 on the understanding that no tax for 2008 was payable. The Minister imposed the maximum late filing penalty of $2,500 under s. 162(7) of the Tax Act in respect the late filed T1135.  The TCC allowed the appeal finding that, although the penalty under s. 162(7). is a strict one to which no due diligence defence applies, even strict penalties should not be imposed if the taxpayer has taken all reasonable steps to comply with the Tax Act referencing the TCC decision of Home Depot of Canada Inc. (2009 TCC 281).  The court concluded that the taxpayer acted reasonably, knowing that no returns are required if no tax is payable and that while a judge made due diligence defence should be applied sparingly, this was a case in which it should be applied.

The Snow decision of the TCC (2012 TCC 78) deals with the unusual situation where a Canadian living abroad is attempting to assert that they continued to be a resident of Canada.  The taxpayer had moved to New Zealand with her husband while he took his masters degree.  She continued to receive the Canada Child Tax Benefit and the Goods and Services Tax Credit while overseas. The Minister assessed the taxpayer to recover these amounts on the basis that she was a non-resident of Canada throughout the period they lived in New Zealand from 2003 to 2011.

Initially the taxpayer and her husband moved so that he could pursue a masters degree and at the time they always intended to return.  After obtaining his masters degree three years after departing to New Zealand, they decided to stay so the huband could pursue his doctorate. He did so in 2011 and they then returned to Canada.

For most of this time, the taxpayer was receiving the Canada Child Tax Benefit and the Goods and Services Tax Credit. In 2010, the Minister determined that the taxpayer was not entitled to these benefits on the basis that she was not a resident of Canada.  The Court determined that the taxpayer's stay in New Zealand was transitory while her husband pursued his masters degree. However, once he decided to pursue his doctorate at the end of 2006, the connection to New Zealand became more permanent and the taxpayer ceased to be a resident of Canada at that time.

The determination of residence is a mixed question of fact and law and this case just shows you how difficult it can be to determine where the line is between resident and non-resident status.

This month there were a couple of Federal  cases with status Indians earning income from a commercial fishery which income was held to be non-taxable

In Ballantyne (2012 FCA 95) the taxpayer was a status Indian who had lived his entire life on a reserve on the shores of Lake Winnipeg. He was a fisherman who caught most of the fish off the reserve and sold his catch to a company located off the reserve through an on reserve co-operative made up mostly of Treaty Indians.  In rendering their decision that the income was situated on reserve and therefore tax exempt, the court relied largely on the analysis in the Robertson and Saunders decision, released at the same time and discussed below.

In Robertson and Saunders (2012 FCA 94) the taxpayers were first nations individuals who conducted a commercial fishing business. The taxpayers were successful on appeal to the TCC because amounts were held to have been earned on a reserve and were thus exempt under s. 87 of Indian Act, even though Mr. Saunders did not live on reserve during the relevant years, unlike Mr. Ballantyne and Mr. Robertson.

As was the situation in Ballantyne, the fishermen sold their fish through a Co-op, all but 4 members of which lived on Reserve.  The Co-op employed 160 Band members all of who lived on reserve.

After considering various factors as set out in the recent SCC decisions of Bastien Estates and Dubé, the taxpayer's commercial fishing activities were held to be situated on a reserve and exempt from income tax under  the Indian Act, despite delivery of fish off-reserve. The EI benefits received by taxpayers were also situated on a reserve because of the situs of their qualifying activities.

It would now appear pretty clear that whether or not a status Indian lives off reserve, if they use the services of an on reserve First nation co-op to sell their commercial fisherires catch the situs of the such income will be held to be on reserve.

One of the biggest problems with taxpayers who loan their "small business corporation" funds to get it started, when things go sideways, no one remembers to file a S.50(1) election.  In fact, there isn't a place on a tax return to make that election so when you efile it actually isn't possible.  This TCC decision of Dhaliwal (2012 TCC 84) the court dealt with this issue and  determined that it was sufficient to communicate the election on an efiled return by simply claiming an ABIL.  In this case the taxpayer was an employee of a company, the principals of which asked him to make a loan to allegedly address short-term cash-flow problems in the company. A short time later the company went out of business and its principals had filed for bankruptcy.

The employee/taxpayer received a nominal payout from the insolvency proceedings and had exhausted all collection channels. In 2008, the taxpayer e-filed his 2007 tax return and completed an ABIL claim of $154,329.15. CRA disallowed his claim on a number of grounds including that it was a non-arm's length loan, there was inadequate evidence that Mainland was a "qualifying small business corporation", the loan did not go bad in 2007, and that taxpayer did not elect to have s. 50(1) of the Tax Act apply.

At the hearing CRA conceded all of the necessary factual elements of the ABIL but continued to argue that no election had been made by the taxpayer to have s. 50(1) apply. The TCC concluded that, as there was no prescribed form for filing the election and no election choice was available when e-filing, it is sufficient to communicate an election by providing in tax return that taxpayer wants to be allowed an ABIL for a particular debt in that year.  A perfectly sensible result for an election that was only necessary to addresss amendments made to the debt foregiveness rules in the 1990s.  We will watch to see if CRA accepts this perfectly reasonable interpretation or instead waste more taxpayers' money appealing this decision.

The Transalta TCC decision (2012 TCC 86) deals with the deductibility of employee bonus payments under a share ownership plan (the Plan). The bonuses were paid to its employees and to those of some of its subsidiaries. These bonuses were paid partly in cash and partly in shares of the taxpayer's own capital stock.

The Minister disallowed the deduction of these bonuses on the ground that the fair market value of is shares was not deductible under the specific provisions of s. 7(3)(b) of the Tax Act and that in issuing its shares the taxpayer did not make a cash outlay or endure a loss of assets of the type intended by Parliament to give rise to a deduction. On appeal the parties limited their dispute to the question of whether or not the fair market value of the shares issued by the taxpayer under the Plan was deductible.

In allowing the taxpayer's appeal, the TCC concluded that as the taxpayer's payment of bonuses under the Plan was purely discretionary, it had not "agreed" to issue shares, so that s. 7(3)(b) was inapplicable, it was the employees' past unremunerated services were being compensated for through the issuance of shares under the Plan, and the value of those services was the fair market value of the shares issued, which was thus the amount of the deduction to which the taxpayer was entitled.

CRA argued that proposed s. 143.3 indicates from a policy perspective what types of deductions are available to a company in repsect of non legally-binding share issue arrangements between employers and employees.  However, the court noted that the provision would not have prevented the deductions had it been in place during the period. The company also argued that the rules in s.7 do not apply as the cases interpreting these provisions make it clear that it only applies to legally binding agreements to issue shares and this plan was offered at the discretion of the Board.

The McClarty Family Trust (MFT) case (2012 TCC 80) evidences the tax planning community's response to the introduction of the Kiddie Tax. In this case the principal of this group of legal entities, Darrell McClarty, wished to distribute income to his professional corporation at capital gains rates and utilizing the marginal tax rates of his minor children who presumably had no other source of income.  The strategy chosen was proposed by his accountant which was, at the time, a well known "off the shelf" tax plan involving a circular series of transactions including stock dividends that would convert what would normally be taxable dividends into sale proceeds from the sale of shares of Mr. McCarty's professional company.

As a result of these arrangments, the beneficiaries each reported capital gains of $16,000 for each of the years under appeal.  The Minister reassessed MFT and the beneficiaries and re-characterized their capital gains as dividends using GAAR and, alternatively, s. 84(3) of the Tax Act.  The taxpayers argued that the transactions were valid and undertaken to creditor protect Mr. McClarty's business from legal action by a former employer.

The TCC concluded that under GAAR there was a tax benefit but there was no avoidance transaction because taxpayers had a valid, bona fide non-tax purpose to protect against contingent claims from the former employer.  The TCC also concluded that s. 84(3) was not applicable as each transaction at issue was legally effective.  As we know, the Tax Act has been amended to stop these transactions but don't be surprised if CRA appeals this case.

Todd Jenkins of Deloitte writes in the March 2012 edition of Privately Speaking - Tax Insights on the subject of buying real estate in the U.S. Sun Belt.  With our population aging and the prospect of time in the sun gaining favour over time on the slopes combined with U.S. sun belt real estate prices at depressed lows and a Canadian dollar at par, interest in U.S. vacation real estate is at an all-time high.

While there are many issues for Canadians to consider in buying U.S. real estate,  the U.S. estate tax is perhaps the key issue that must be understood when deciding on how U.S. real estate should be owned.  The following is an overview of the summary provided by Mr. Jenkins which sets out most of  the important issues which one should consider when buying a U.S. vacation property.

U.S. Estate Tax

The U.S. Internal Revenue Service (IRS) imposes an estate tax on Canadians who own U.S. property at the time of their death when the value of the Canadian individual's worldwide estate exceeds $5 million (U.S. dollars) and the U.S. property is valued at more than $60,000. The estate tax currently has a top rate of 35%. This threshold and the rate will remain in effect through 2012. The U.S. Congress will have to enact legislation to extend the current rules or make changes as they see fit, assuming they are able to come to a decision.

The most common types of ownership are:

• Direct ownership as an individual
• Indirect ownership through a Canadian corporation
• Ownership through a Canadian trust

As Mr. Jenkins suggests, "[d]irect ownership is the simplest way for a Canadian individual, who is neither a U.S. citizen nor a U.S. resident, to own U.S. real estate.  Ownership by an individual should be considered when the value of the property or the worldwide estate is below the thresholds discussed above. Even if the thresholds are exceeded, some Canadians still choose to own the property individually if they decide that the exposure to the U.S. estate tax is not significant compared to the costs of setting up and maintaining other ownership vehicles."

However, this ignores what may be coming after 2012 at which point a Congress desperately looking for more revenues to offset mounting debt may look to a much reduced threshold for worldwide assets.  At $1.0 million, most Canadians with vacation homes will easily be subject to the estate tax.  And unless you have a major investment in your U.S. vacation home, most of the other strategies are prohibitively complex and expensive to implement.

Mr. Jenkins does notes that each individual is allowed his or her threshold amount, such that ownership of the property can be split between spouses and others (e.g., other family members). There are planning techniques that can be used in this scenario to minimize the taxable estate and to maximize the number of exemptions available great care must be paid to ensure that the individuals' wills are consistent with such tax planning.

The other planning options include ownership through a Canadian corporation which was once very popular but in 2004 CRA indicated that the shareholder of such a corporation would be taxable on the deemed benefit of using a property owned by a corporation, a decision that effectively ended this ownership strategy.  The strategy of  ownership through a Canadian trust has become a more common technique for eliminating exposure to the estate tax but it is complex and the costs are not minimal, although they can be insignificant compared to the potential U.S. estate tax savings.

For "ordinary" Canadians buying a U.S. getaway, the current solution found in threshold relief is found in the Canada U.S. Tax Treaty.  Will that relief still be there next year?  Stay posted.

In the March 2012 edition of Privately Speaking - Tax Insights, Deloitte reminds us of the new CPP rules that came into effect on January 1, 2012. For individuals who are under the age of 65 years and are receiving a CPP retirement pension, they must now contribute to CPP if they are employed. For individuals who are between 65 and 70 years of age and are receiving a CPP retirement pension, they too must now contribute to CPP if they are employed, unless they file an election to stop contributing to CPP (Form CPT30).

An example is included as are some factors to consider in making the decision when to start receiving the CPP retirement pension.

In this excellent article entitled, "Using Tax Losses Within a Corporate Group" by Steve Suarez of Borden Ladner Gervais LLP, the author reviews the types of tax losses that may be incurred within a corporate group and then suggests ways in which the value of the losses may be maximized.  As we know, the Tax Act does not currently contain rules for corporate group relief that simply consolidate one corporation's losses against income of a related corporation, although the government is currently studying implementing such a US style system.

As we know, non-capital losses for a year can be applied against any income from other sources (including capital gains) realized by the taxpayer in the same year, the three preceding taxation years or the 20 following taxation years. Capital  losses realized in a year may be deducted against any capital gains realized in that year, the three preceding taxation years or any later taxation year although capital losses may only be deducted against capital gains.

Mr. Suarez also notes that in principle "losses should only be recognized for tax purposes where there is a disposition of the relevant property outside of the corporate group."  Accordingly it is noted that, as a general rule, the Tax Act denies or suspends recognition of capital losses on transfers of property between related parties, or where the taxpayer (or a related party) acquires an identical property within 30 days before or after the time the loss property is disposed of. Loss denial rules also apply to certain specific property, such as shares on which the taxpayer has received certain tax-advantaged dividends or loans not made for the purpose of earning income.

Under the heading of  "Intra-Group Loss Planning", the author further notes that in general terms, CRA considers tax planning to use losses between related parties to be acceptable, while planning to allow one taxpayer to use the losses of an unrelated taxpayer is viewed as contrary to the scheme of the Tax Act.

This article offers an excellent and concise summary of some of the more important ways in which Canadian corporations within a related group can access tax losses.  The article is worth downloading for future reference and includes a discussion of topics such as:

• Wind-ups and Amalgamations
• Routing Gains Through Lossco
• Lossco Asset Sale
• Inter-Company Charges
• Lossco Debt Refinancing
• Interest Expense/Dividend Loss Consolidations