A. Tax Legislation
1. Northwest Territories Budget 2017
The NWT tabled its 2017-2018 budget on February 1, 2017.
The tax highlights are as follows:
- The budget does not include any new taxes or tax rate changes;
- property tax mill rates and a number of fees will be adjusted for inflation
- tobacco taxes were raised to 30.4 cents per cigarette and 27.2 cents per gram of loose tobacco, effective April 1, 2017
- the government is investigating the introduction of a price on carbon of $10 per tonne of greenhouse gas emissions in 2018-2019
- the government is also contemplating the introduction of a sugary drink tax in 2018-2019, as a price incentive to discourage the consumption of sugary drinks that are linked to health issues such as obesity and diabetes
- amendments will be proposed to further enhance the NWT Child Benefit, with increased direct support for families with children this year and next whose annual income is under $80,000
- the budget also introduced a home repair program to assists seniors with income below the core need threshold to make necessary repairs to their residences.
2. New Brunswick Budget 2017
On February 7, 2017, New Brunswick introduced the 2017-2018 Budget. The Budget introduced the following tax measures:
- No new taxes or tax increases.
- the budget confirmed the previously announced increase in the small business investor tax credit for individuals from 30% to 50%. The eligibility was also expanded to include community economic development funds
- the New Brunswick small business investor tax credit provides a 50% (for investments made after April 1, 2015) non-refundable personal income tax credit of up to $125,000 per year (for investments of up to $250,000 per individual investor) to eligible individual investors who invest in eligible small businesses and/or community economic development corporations in the province
- in addition, the New Brunswick small business investor tax credit provides eligible New Brunswick corporations and trusts a 15% non-refundable corporate income tax credit of up to $75,000 per year (for investments of up to $500,000)
- effective April 1, 2017, the small business income tax rate will be lowered from 3.5% to 3.0%, with an overall goal of reducing the rate further to 2.5%.
3. British Columbia Budget 2017
- Effective January 1, 2018, Budget 2017 reduces MSP premiums by 50% for households with annual net incomes less than $120,000. To receive the 50% reduction, households will be required to register. British Columbians whose premiums are paid through group plans will do so through their group plan administrator. The Ministry will automatically register individuals and families who currently receive MSP premium assistance. This measure will impact approximately 2 million British Columbians and result in annual reductions of up to $450 per year per individual and $900 per year for a family.
- The income threshold at which households are fully exempt from MSP will increase by $2,000 from $24,000 to $26,000 for a single adult, effective January 1, 2018. The increase will be from $33,000 to $35,000 for a family of four.
- As announced in September 2016, the government cancelled the planned 4% increase to the maximum 2017 MSP premiums. The 2017 maximum MSP premium will remain at $75 per month per adult.
- Budget 2017 provides no relief for households earning $120,000 or more per year. Minister De Jong indicated that further expansion of MSP reductions will depend upon fiscal capacity of the province in the future.
- Effective for registrations on or after February 22, 2017, the fair market value threshold for eligible residential property under the First Time Home Buyers’ Program increases from $475,000 to $500,000. The partial exemption applies to residential properties valued at between $500,000 and $525,000.
- As announced on January 10, 2017, the threshold for the phase-out of the home owner grant increases from $1.2M to $1.6M. The grant is reduced by $5 for every $1,000 of assessed value over the $1.6M threshold.
Decrease of dividend tax credit rate
- British Columbia provides a dividend tax credit to prevent double taxation of dividend income that has already been taxed at the corporate level. Effective for the 2017 and subsequent tax years, the dividend tax credit rate on ineligible dividends is decreased from 2.47% to 2.18%. The purpose of this decrease is to match the reduction in the small business corporate tax rate from 2.5% to 2%, also announced in Budget 2017.
- The dividend tax credit available for eligible dividends (i.e., income not eligible for the small business rate) remains unchanged.
Business tax measures
Small business corporate income tax reduction
- For taxation years that straddle the effective date, the tax rate is prorated based on the number of days in the taxation year ending after April 1, 2017. As a result, the effective provincial tax rate for corporations with a calendar year end for 2017 is 2.12%, falling to 2.0% in 2018. When combined with the federal tax rate, the effective tax rate for a CCPC on its first $500,000 of qualifying active business income is 12.62% for calendar 2017, falling to 12.5% in 2018. The 12.5% rate will be the second lowest rate in Canada, matching Alberta and Saskatchewan.
- The general corporate rate on qualifying active business income in excess of the normal limitations remains unchanged at 11% (26% combined with the federal rate).
Credit union additional deduction
- Prior to 2013, credit unions received a preferential federal and provincial small business rate on a portion of their income. In 2013, the federal government commenced a 5-year phase-out of its preferential tax treatment. British Columbia’s Budget 2014 announced the phase-out of the provincial preferential tax rate starting in 2016.
- As announced on January 24, 2017, Budget 2017 pauses the phase-out of the provincial small business rate on qualifying income for credit unions. This change means that for the 2017 tax year, credit unions will continue to receive 80% of the full preferential tax treatment. As a result of the reduction in the small business rate discussed above, credit unions’ effective tax rate on qualifying income for calendar 2017 is 18.9% (15% federal and 3.9% provincial) and 18.8% for calendar 2018 (15% federal and 3.8% provincial).
Incentives for innovation
- Budget 2017 extends the provincial SR&ED tax credit (ITC) for five years to August 31, 2022. British Columbia offers a 10% tax credit on qualifying expenditures and a refundable ITC to qualifying corporations. A qualifying corporation is entitled to a refundable ITC on its first $3 million of annual SR&ED expenditures.
A refundable BC interactive digital media tax credit (IDMTC) is available for eligible registered corporations that develop interactive digital media products in British Columbia after August 31, 2010. Effective February 22, 2017, qualifying BC labour employed in the development of augmented reality and virtual reality products are eligible for the IDMTC. The IDMTC is computed as 17.5% of eligible “salary or wages”. In addition, Budget 2017 removes the requirement for a corporation’s principal business to be the development of interactive digital media products where annual qualifying BC labour exceeds $2 million.
For the purposes of the IDMTC, augmented reality product means a product that enhances the user’s perception of reality by superimposing digital information on the user’s field of vision for the primary purpose of entertainment. Likewise, virtual reality product means a product that immerses the user in an artificial environment for the primary purpose of entertainment. The IDMTC does not apply to film or videos that provide the user with limited or no immersion, including 360°, 270°, and 180° videos, spherical videos and panoramic videos.
Interactive digital media corporations participating in the small business venture capital program are eligible to claim the IDMTC for taxation years that end after February 21, 2017.
- A BC venture capital corporate tax credit is available in respect of investments in shares of a registered venture capital corporation or eligible business corporation. The venture capital tax credit is increased from $35 million to $38.5 million for 2017 and subsequent years. Budget 2017 indicates this will allow for up to $11.7 million in additional equity financing for qualifying corporations annually.
- Under the program, eligible investors can receive an income tax credit of 30% of their investment in eligible business corporations, up to an annual limit of $60,000. An eligible new corporation must qualify as an eligible business corporation under the federal Income Tax Act, must have been incorporated for less than two years, and must be doing business in a targeted sector: community diversification, development of interactive digital media products, clean technology, prescribed manufacturing and processing, destination tourism or research and development of proprietary technology.
- The venture capital tax credit does not reduce the adjusted cost base of the related shares acquired and is not required to be included in income for tax purposes.
- A refundable BC mining exploration tax credit is available in respect of qualified mining exploration expenses incurred in British Columbia by a corporation that maintained a permanent establishment in the province at any time in the taxation year. Qualifying expenditures must be incurred before January 1, 2020 (extended from 2017 by Budget 2016) and generally include expenditures made to determine the existence, location, extent or quality of a mineral resource in British Columbia.
- Any flow-through mining expenditures renounced under the federal Income Tax Act do not qualify for the BC credit. As announced on January 23, 2017, Budget 2017 expands the mining exploration tax credit to allow the cost of environmental studies and community consultation incurred after February 28, 2015. The credit is 20% of eligible BC mining expenditures and increases to 30% if the exploration is in the mountain-pine-beetle-affected area.
- The BC mining exploration tax credit must be claimed no later than 36 months after the end of the applicable taxation year; however, beginning January 1, 2017, the period for claiming the credit for a taxation year is reduced from 36 to 18 months after the end of the taxation year. The credit is fully refundable to the extent that it is not otherwise required to reduce BC corporate taxes payable and there are no carryback or carryforward provisions in respect of the credit.
- Also as announced on January 23, 2017, Budget 2017 extends the BC mining flow-through share tax credit to the end of 2017.
Phase-out of provincial sales tax (PST) on electricity
- British Columbia is currently the only jurisdiction in North America that levies a sales tax on electricity. Budget 2017 introduces a phase-out of the PST on taxable electricity to improve the competitiveness of BC businesses:
- Effective October 1, 2017, the PST rate will be reduced from 7% to 3.5% of the purchase price of electricity. Effective April 1, 2019, electricity will be fully exempt from PST. This reduction, when fully implemented, is expected to provide businesses with savings of $150 million annually. This measure was introduced following one of the recommendations made by Commission on Tax Competitiveness, which is an independent commission that was established in Budget 2016 to advise the province on how to modernize British Columbia’s business taxes.
- Budget 2017 also indicates the government’s acknowledgement that further improvements to the PST are a priority for the business community, which was a key finding of the Commission on Tax Competitiveness. Budget 2017 notes that future steps to mitigate the negative effects of the PST and other business taxes will be considered in the context of the province’s fiscal situation and competing funding priorities.
Children and families
- A number of smaller measures aimed at additional support for children and families were announced, such as a back-to-school tax credit of up to $250 per child. With the introduction of this back-to-school tax credit, the education tax credit is being eliminated effective January 1, 2017. Unused education amounts carried forward from years prior to 2018 remain available to be claimed in 2018 and subsequent taxation years.
Motor fuel tax
- Effective October 1, 2017, natural gas for use in an internal combustion engine for any rolling stock or vehicles which run on rails is exempt from the 3 cents per litre tax on locomotive fuel.
- Effective October 1, 2017, the tax rate on cigarettes will increase from $47.80 to $49.40 per carton of 200 cigarettes. The tax rate on fine-cut tobacco is increased from 23.9 cents to 24.7 cents per gram.
Training tax credits
- The BC training tax credits are extended for three years to the end of 2020. A refundable tax credit is available to sole proprietors, partnerships and corporations with a permanent establishment in British Columbia in respect of salary and wages paid to an employee registered in a prescribed program administered through the BC Industry Training Authority. Available credits include a basic tax credit, a completion tax credit, and an enhanced tax credit.
4. Nunavut Budget 2017
5. Budget Dates 2017
Federal – March 22, 2017
Alberta – March 16, 2017
British Columbia – February 21, 2017
Manitoba – April 11, 2017
New Brunswick – February 7, 2017
Newfoundland & Labrador – TBD
Northwest Territories – February 1, 2017
Nova Scotia – TBD
Nunavut – February 22, 2017
Ontario – TBD
Prince Edward Island – TBD
Quebec – TBD
Saskatchewan – March 22, 2017
Yukon – TBD
6. Accounting Firm 2017 Budget Commentaries
For information on 2017 Federal, Provincial and Territorial budgets please see the following sites:
7. Law Firm 2016 Federal Budget Commentaries
2016 Federal Budget Commentaries by Law Firms (to be updated once the 2017 Federal Budget is released):
8. Status of Tax Treaty Negotiations
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 Treaties or TIEA’s this month:
9. Department of Finance - Summary of Outstanding Draft Legislation 2016
The Department of Finance Website lists pending, draft tax legislation. This is where you can find links to the various Notices of Ways and Means Motions and draft technical legislative proposals which have not yet become law, as well as the Department of Finance’s explanatory notes for the proposed tax changes. If you’re looking for the status of proposed tax legislation as it progresses though Parliament until it is Proclaimed into Force, please follow this link to the “Federal Statutory Updates”. For additional details on tax legislation contact 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 information.
10. Personal and Corporate Tax Rates
PwC – Combined Tax Rates
BDO – Tax Facts 2016
Deloitte – Personal and Corporate Tax Rates Archive
KPMG – Tax Facts 2016 – 2017 (202 pp) current to December 30, 2016
B. CRA's Interpretations
11. CRA Updates Information Circular Checklist
The IC publications provide CRA’s views on the application of various provisions of the Income Tax Act such as the application of Voluntary Disclosures Program, Electronic Record Keeping, Collection Policies, the Tax Audit as well as many other aspects of the administration of the Income Tax Act and for that reason are an excellent first stop if you want to gain an understanding how CRA will administer various provisions of the Tax Act.
|IC00-1R5||2017-01-13||Voluntary Disclosures Program|
|IC01-1||2001-09-18||Third-Party Civil Penalties|
|IC05-1R1||2010-06-01||Electronic Record Keeping|
|IC06-1||2006-10-05||Income Tax Transfer Pricing and Customs Valuation|
|IC07-1||2007-05-31||Taxpayer Relief Provisions|
|IC12-1||2012-05-18||GST/HST Compliance Refund Holds|
|IC13-1R1||2015-03-20||Pooled Registered Pension Plans (PRPP)|
|IC13-2R1||2014-11-01||Government programs collection policies|
|IC13-3||2013-05-01||Customs Collection Policies|
|IC70-6R7||2016-04-22||Advance Income Tax Rulings and Technical Interpretations|
|IC71-14R3||1984-06-18||The Tax Audit|
|IC71-17R5||2005-01-01||Guidance on Competent Authority Assistance Under Canada’s Tax Conventions|
|IC72-5R2||2003-01-03||Registered Supplementary Unemployment Benefit Plans|
|IC72-13R8||1988-12-16||Employees’ Pension Plans|
|IC72-17R6||2011-09-29||Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada – Section 116|
|IC72-22R9||1996-06-17||Registered Retirement Savings Plans|
|IC73-13 (SR)||1992-04-06||Special Release – Investment Clubs|
|IC73-21R9||2006-10-19||Claims for Meals and Lodging Expenses of Transport Employees|
|IC74-21R||1977-06-06||Payments out of Pension and Deferred Profit Sharing Plans – ITAR 40|
|IC75-2R9||2016-11||Contributions to a Registered Party, a Registered Association or to a Candidate at a Federal Election|
|IC75-6R2||2005-02-23||Required Withholding From Amounts Paid to Non-Residents Providing Services in Canada|
|IC75-7R3||1984-07-09||Reassessment of a Return of Income|
|IC75-23||1975-09-29||Tuition Fees and Charitable Donations Paid to Privately Supported Secular and Religious Schools|
|IC76-12R6||2007-11-02||Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Countries With Which Canada Has a Tax Convention|
|IC76-19R3||1996-06-17||Transfer of Property to a Corporation Under Section 85|
|IC77-1R5||2007-08-17||Deferred Profit Sharing Plans|
|IC77-6R||2011-12-30||Designation as Associated Charities|
|IC77-9R||1983-06-22||Books, Records and Other Requirements for Taxpayers Having Foreign Affiliates|
|IC77-11||1977-06-13||Sales Tax Reassessments – Deductibility in Computing Income|
|IC77-16R4||1992-05-11||Non-Resident Income Tax|
|IC78-4R3||1986-11-14||Investment Tax Credit Rates|
|IC78-4R3(SR)||1987-11-13||Special Release – Investment Tax Credit Rates|
|IC78-10R5||2010-06-01||Books and Records – Retention/Destruction|
|IC78-14R4||2006-07-01||Guidelines for Trust Companies and Other Persons Responsible for Filing T3GR, T3D, T3P, T3S, T3RI, and T3F Returns|
|IC78-18R6||2002-03-06||Registered Retirement Income Funds|
|IC82-2R2||1992-11-20||Social Insurance Number Legislation That Relates to the Preparation of Information Slips|
|IC84-1||1984-07-09||Revision of Capital Cost Allowance Claims and Other Permissive Deductions|
|IC84-6||1984-12-28||Canada-United States Social Security Agreement|
|IC87-2R||1999-09-27||International Transfer Pricing|
|IC87-3||1987-05-08||Alberta Stock Savings Plan|
|IC88-2||1988-10-21||General Anti-Avoidance Rule – Section 245 of the Income Tax Act|
|IC88-2 Sup.1||1990-07-13||Supplement – General Anti-Avoidance Rule|
|IC89-3||1989-08-25||Policy Statement on Business Equity Valuations|
|IC89-4||1989-08-14||Tax Shelter Reporting|
|IC93-3R2||2016-05-04||Registered Education Savings Plans|
|IC94-4R||2001-03-16||International Transfer Pricing: Advance Pricing Arrangements (APAs)|
|IC94-4R (SR)||2005-03-18||Special Release – Advance Pricing Arrangements for Small Businesses|
|IC98-1R6||2017-01-19||Tax Collections Policies|
|IC98-2||1998-09-01||Prescribed Compensation for Registered Pension Plans|
|IC99-1R1||2016-02-10||Registered Disability Savings Plans|
12. CRA Release on Split Receipting
In a recent release, CRA provides some examples of how the “split receipting” rules are used to calculate the eligible amount of a gift for receipting purposes when the donor has received an advantage (consideration) in return for his or her donation.
To figure out the eligible amount of the gift, a charity has to subtract the fair market value (FMV) of the advantage from the FMV of the gift.
Criteria for split receipting
- Where a donor receives an advantage in exchange for a gift, a charity must be able to come up with an accurate figure for the FMV of that advantage.
- The gift, minus the advantage, still has to constitute a voluntary transfer of property and meet the intention to make a gift threshold.
What is the intention to make a gift threshold?
When the FMV of an advantage received for a gift is more than 80% of the FMV of the gift itself, CRA generally considers that there is no true intention to make a gift. Therefore, a charity cannot issue a receipt.
Sometimes, although not very often, the intention to make a gift threshold has not been met but there was a clear intention to make a gift. In these cases, the donor must be able to prove to the CRA that they intended to make a gift.
Understanding the de minimis rule
Certain advantages are of nominal value, and are considered too minimal to affect the value of a gift.
Advantages that have a combined FMV that is not more than $75 or 10% of the FMV of the gift, whichever is less, are considered too minimal to affect the amount of the gift. A charity does not have to subtract these advantages from the FMV of the gift when issuing receipts.
The de minimis rule does not apply to:
- cash or near-cash equivalents (for example, redeemable gift certificates, vouchers, and coupons)
- the object of a fundraising event (for example, the meal at a fundraising dinner, or the green fees, cart rental and meal at a golf tournament)
The charity must always subtract the value of these items from the FMV of the gift before issuing a receipt.
- For examples as to the application of these rules please refer to the Split Receipting Release or see the Folio S7-F1-C1, Split-receipting and Deemed Fair Market Value
For more information on Related Topics please see the following:
13. CRA Guides and Releases
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. The full list of newly released forms and guides 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:
- T3APP T3 Application for Trust Account Number
- T2050 Application to Register a Charity Under the Income Tax Act
- RC79 Deposit Advice
- RC4004 Seasonal Agricultural Workers Program
- T1175 Farming – Calculation of Capital Cost Allowance (CCA) and Business-use-of-home Expenses
- R107 Regulation 105 Waiver Application – Film Industry
- T920 Application to amend a registered pension plan
- RC65 Marital Status Change
- RC66 Canada Child Benefits Application
- RC113 Direct Deposit Request for Children’s Special Allowances (CSA)
- RC473 Application for Non-Resident Employer Certification
- T733 Application for a Retirement Compensation Arrangement (RCA) Account Number
- T735 Application for a Remittance Number for Tax Withheld from a Retirement Compensation Arrangement (RCA)
- RC512 Confidential Disclosure Form
- T4114 Canada Child Benefit and related provincial and territorial programs
Executive TaxBriefs is dedicated to providing the most current monthly updates on income tax matters affecting Owner-managers. However, in this news item we also provide links to resources related to important GST/HST/PST resources.
CRA pages on GST/HST:
New GST/HST Forms, Guides or Releases this month:
- GST193 GST/HST Transitional Rebate Application for Purchasers of New Housing
- GST192 GST/HST Transitional Rebate Application for Builders of New Housing on Leased Land
- RC151 GST/HST Credit Application for Individuals Who Become Residents of Canada
15. CRA Prescribed Interest Rates and Bank of Canada Exchange Rates
Interst rates for the second calendar quarter of 2017 remain the same as the first calendar quarter. They are as follows:
- Overdue taxes 5%
- Overpaid taxes/non-corporate 3%
- Benefits and overpaid corporate taxes 1%
Follow this link for prior period prescribed interest rates.
For exchange rates see:
16. Technical Interpretations, Folios, Interpretation Bulletins and Audit Manual Note
TECHNICAL INTERPRETATIONS: (“TIs”) are not published on CRA’s website although inquiries regarding such items may be made directly to the Rulings Directorate by e-mail to firstname.lastname@example.org.
Currently, a website called Tax Interpretations is providing free access to these copyrighted protected materials. To locate a specific technical interpretation go to http://taxinterpretations.com/ and enter the number of the TI in their search box.
FOLIOS: The Canada Revenue Agency (CRA) issues income tax folios to provide technical interpretations and positions regarding certain provisions of our income tax law. Due to their technical nature, folios are used primarily by tax specialists and other individuals who have an interest in tax matters. While the comments in a particular paragraph in a folio may relate to provisions of the law in force at the time they were made, such comments are not a substitute for a review of the law as enacted from time to time. Folio readers are cautioned to consider such commentary in light of the relevant provisions of the law in force for the particular tax year being considered. For more information see the Income Tax Folios Index.
INTERPRETATION BULLETINS: Current Listing by IT No.; ITB and IT Technical News Index – By Section, by Topic, and more.
AUDIT MANUAL: CRA’s internal audit policies and procedures are now available for review by outsiders in their Audit Manual large parts of which have been disclosed to the public and are available on our website as released January 2012.
17. CRA Describes What a s. 115(5) Remittance Letter Should Disclose
Question 14 from the CPA Alberta Roundtable – May 2016
In response to Q.14 of the may 2016 Alberta CPA Roundtable, CRA provides its views on the s.116(5) remittance procedure.
Question: A T2062 is required to be filed by non-residents disposing of certain assets, including Canadian real estate (ss. 116(1) to (3)). In the event the vendor fails to file the T2062 form, the purchaser is required to remit 25% of the gross proceeds [in the case of a capital property]. Can the CRA advise how such remittance is to be paid to CRA where the vendor has either not complied with the requirement to file Form T2062 or has not provided a copy of that filing, or any Certificate, to the purchaser? This would commonly mean the purchaser has no tax identification number for the vendor.
In the case where a non-resident vendor has not complied with the requirements of Section 116 and/or has not provided a Certificate of Compliance to the purchaser, the purchaser is required to remit the amount required as per subsection 116(5) and/or subsection 116(5.3). The purchaser is not required to provide a vendor identification number.
When making the remittance to the CRA, the purchaser should attach a letter specifying that the remittance relates to subsection 116 (5) or 116(5.3). The letter should also provide the following information:
- the purchaser’s full name and address
- the non-resident vendor’s name
- the non-resident vendor’s address (if available)
- a description of the property (as much detail as possible)
- the date of the acquisition
- a copy of the purchase agreement and/or other documents, such as the Statement of Adjustments, to support the purchase price.
Editor’s note: Because S. 116(5) is an independent charging section in Part I of the Tax Act, it would appear that once the conditions of s.116(5) have been met, even if the non-resident pays their Part I tax liability, there is no provision of the Tax Act to relieve the obligation of the Purchaser under S.116(5).
18. Deductability of Rent Paid by Corporation for Use of its Shareholder’s Home
Question 15 of the CPA Alberta Roundatble – May 2016 responded to the following query:
A practitioner recently reported an experience with a CRA auditor who indicated that a monthly rental payment from a corporation to its shareholder was required to be reported on CRA form T4A Statement of Pension, Retirement, Annuity, and Other Income, the corporation should complete CRA form T2200 Declaration of Conditions of Employment and the shareholder should make any applicable claim for expenses in respect of the workspace in his residence on CRA form T777 Statement of Employment Expenses.
Can CRA advise whether this is their interpretation for all such claims, as a matter of CRA policy? We would appreciate CRA’s comments on the following variations on such payments from corporation to shareholder/employee:
(a) A monthly payment based on estimated cost reimbursement for costs related to the workspace in the individual’s home;
(b) A reimbursement of actual costs; that is, the corporation reimburses the home owner (who is also a shareholder) for a portion of actual, receipted expenses (mortgage interest, property tax, insurance, maintenance, utilities), based on the portion of the square footage of the residence which is used by the corporation for business purposes;
(c) A rental payment to the owner of the residence (who is also the shareholder/employee), which we suggest would appropriately be reported on CRA form T776 Statement of Real Estate Rentals and not CRA form T777 Statement of Employment Expenses.
(d) Does a shareholder need to become a registrant, collect GST and claim ITCs in the situation where an associated corporation (that is a GST registrant) is renting office space located in the shareholder’s home?
In general, a monthly rental payment from a corporation to its employee/shareholder would not be a typical arrangement for a lease of space. We consider such a payment to be meant to compensate an employee/shareholder for costs related to use of office space in the home and would not generally be reported as rental income included on a T776.
In addition, the T2200 and T777 would only apply to situations where the shareholder is also considered an employee of the corporation. Where this is the case, the employee would have to meet the conditions of a workspace in home under subsection 8(13) in order to claim expenses. The expenses claimed would be reduced by any payments received from the corporation.
(a), (b) and (c) Benefit/deduction
In each of the examples, a monthly payment based on estimated or actual costs related to a work space in home could be deducted by the corporation, if reasonable in the circumstances. Generally, we would evaluate reasonableness in relation to the actual costs incurred by the shareholder. We would also expect, at a minimum, that the space is needed to file records, book appointments, take business phone calls and perform other administrative functions, as the case may be, and that there is no other space available to the corporation.
If the amount exceeds a reasonable amount, the excess should be reported by the shareholder as a benefit under subsection 15(1).
The comments in paragraphs 2 – 8 in archived IT-352R2, which deals with Employee’s Expenses, should be referred to. Even though the bulletin refers to employee expenses, the same principles apply would apply in an employee/shareholder situation. Therefore, no mortgage interest or capital cost allowance (CCA) should be claimed.
Also, where there is a personal use element to the home office, a further adjustment may be required to determine applicable business use.
In any case, any payment or reimbursement should be included in the income of the employee shareholder subject to deductions available under subsection 8(13).
(d) GST small supplier
Where the total amount of all revenues (before expenses) from the shareholder’s worldwide taxable supplies from all its businesses and those of its associates is $30,000 or less in any single calendar quarter and in the last four consecutive calendar quarters, the shareholder would be considered a small supplier and would not be required to register and account for GST/HST.
19. Distribution of Trust Property to Beneficiary
TI2015-0576751E5 is a French language TI released 2017/01/19 by the Financial Industries Division of the Rulings Directorate and translated by Tax Interpretations. The full translation may be accessed through the Tax Interpretations website subject to their access policy.
Given that CRA only releases these publications to firms willing to pay the almost $70,000 annual licence fee and further in view of the fact that CRA does not release translations of their Technical Interpretations in both official languages – a completely unacceptable policy given how relevant these materials are – we would strongly urge readers to pay the Tax Interpretations subscription price for full access to the Tax Interpretations website – the presentations are concise and very timely – far better than the commercial services this writer has observed. Given that CRA’s technical interpretations of the Tax Act is only published in one official language, a practitioner could easily advise a client to follow a course of action when there exists a CRA interpretation contrary to the advice given by CRA in the official language the practitioner is not proficient in. This situation is unacceptable and has been pointed out in previous editorial comments, this practice by CRA is unacceptable. All technical interpretations should be available for free in both languages. Until then, get yourself a subscription to the Tax Interpretations website.
Tax Interpretations summarizes this external technical interpretation request as follows:
Principal Issues: 1) Does paragraph 13(7)(e) apply when a trust is deemed to have disposed of depreciable property pursuant to subsection 104(5)?
2) Does paragraph 13(7)(e) apply when a taxpayer acquires a depreciable property subject to subsection 107(2.1)?
3) Does subsection 107(2) apply to a distribution of property when the distribution is conditional on the assumption of a trust’s debt by the beneficiary?
Position: 1) No 2) Possibly yes. 3) Question of facts.
Reasons: 1) A trust is not related to itself and is not deemed not to deal at arm’s length with itself. Therefore, the trust didn’t acquire the property from a non-arm’s length person as required by paragraph 13(7)(e). 2) The beneficiary has acquired the property from the trust. Pursuant to paragraph 251(1)(b), the beneficiary and the trust are deemed not to deal with each other at arm’s length. Therefore, paragraph 13(7)(e) can apply if all the other conditions are met. 3) Likely yes if the assumption of debt by the beneficiary does not have an impact on the status of the personal trust.
For a detailed explanation of CRA’s views on these questions, see the full translation of TI 2015-0576751E5 F – Trust, Disposition of depreciable property, Assumption .
20. Failure to Make a GRE Designation in the First Estate Return Accomodated by CRA
In response to Question 8 from the May 2016 CPA Alberta Roundtable CRA states that it will accommodate failures to make a GRE designation in the first estate return.
To be a graduated rate estate, the estate, amongst more substantive requirements, must designate itself as a GRE in its first T3 return. CRA stated:
If the designation for the trust to be a GRE is omitted in error, an adjustment request containing the elements required for the designation and the rationale for the omission from the original filing may be submitted to the CRA.
No time limitation was stated.
21. What Constitutes Regular Places of Employment for Travel Reimbursements to be Taxable Benefit
In this tax news item, Tax Interpretations summarizes Question 3 from the May 2016 CPA Alberta Roundtable which considers, if an individual has multiple regular places of employment (RPE) and travels between them during the day, is the trip from the individual’s home to the first RPE and the trip home from the last RPE to his home personal, whereas travel between RPEs is considered employment-related – so that reimbursement of or allowances respecting the former but not the latter would give rise to employment benefits. In this context, CRA stated that “travel between an employee’s home and their employer’s business location is personal, even when the employee has a home office that is a regular place of employment” (as compared with the 1990 Cork decision of the FCA), and that “a location may not be a RPE for an individual if, for example, the individual works at that particular location only once during the year or perhaps for only a few days in the year.”
For a more extensive explanation of CRA’s position see the CRA analysis provided in full on the Tax Interpretations website.
22. Penalties for Failure to Report pre-2015 Income not to Garner Current Favourable Rate
Tax Interpretations Neal Armstrong points out that the amended version of s. 163(1) imposes penalties for the 2015 and subsequent taxation years in accordance with a more favourable formula than previously. However, in this response to question 4 of the May 2016 Alberta CPA Roundtable, CRA advises it will not exercise its discretion under s. 220(3.1) to reduce penalties assessed for the 2014 and prior taxation years to this more favourable basis, and instead will only apply its usual (somewhat onerous) criteria for penalty relief.
For a more comprehensive discussion of CRA’s response see the tax Interpretations website.
23. Principal-Business Corporations in the Resource Industries - Folio S3-F8-C1
The Act provides various incentives for principal-business corporations operating in resource industries. This Chapter discusses the criteria for determining whether a corporation qualifies as a principal-business corporation (PBC) as that term is defined in subsection 66(15). In general, a PBC is a corporation whose principal business includes one or a combination of the qualifying business activities described in paragraphs (a) to (i) in the definition.
The Chapter also outlines the significance of PBC status for income tax purposes and discusses some general information that could be useful to a corporation when determining this status.
A separate webpage entitled “Chapter History” notes the following most recent changes to this Chapter:
Update February 1, 2017
¶1.30 discusses the definition of flow-through mining expenditure, which was added to subsection 127(9), by S.C. 2001, c. 17, s. 118(7), applicable, initially, from October 18, 2000, to 2003. Various amendments to the definition have extended the period to which it applies. ¶1.30 has been revised to reflect the most recent extension of the period to which the definition of flow-through mining expenditure applies.
Update February 5, 2016
¶1.30 discusses the definition of flow-through mining expenditure, which was added to subsection 127(9), by S.C. 2001, c. 17, s. 118(7), applicable, initially, from October 18, 2000, to 2003. Various amendments to the definition have extended the period to which it applies. ¶1.30 has been revised to reflect the most recent extension of the period to which the definition of flow-through mining expenditure applies.
24. Business Use of Home Expenses - Folio S5-F2-C2
This newly published Folio Chapter deals with expenses incurred in earning income from a business that are normally deductible in computing income to the extent they are reasonable. This Chapter deals with the conditions and restrictions placed on the deductibility of business expenses that relate to the use of an office or other work space in an individual’s home. The work space must be used for specified purposes and the expenses deducted relating to that use must not exceed the individual’s income from the business for a tax year (computed without reference to certain amounts). This Chapter also deals with the carryforward of any excess to the immediately following tax year.
This Chapter is applicable to individuals who are a sole proprietor or a partner in a partnership . For information concerning the deductibility of expenses relating to an employee’s use of an office or other work space in the home, see Interpretation Bulletin IT-352, Employee’s Expenses, Including Work Space in Home Expenses, the CRA webpage Work-space-in-the-home expenses or Guide T4044, Employment Expenses.
For a general overview of the deductibility of business expenses relating to the use of an office or other work space in the home, see Line 9945 – Business-use-of-home expenses. For an example of how to calculate business use of home expenses, see Calculating business-use-of-home expenses. Where the work space relates to a home daycare business, see the CRA webpage Daycare in your home.
For information regarding home office and other types of expenses that are eligible for deduction by a sole proprietor or a partner in a partnership, see Guide T4002 Business and Professional Income or the CRA webpage Business expenses. The tax implications arising from the use of a principal residence for income-producing purposes are outlined in Income Tax Folio S1-F3-C2, Principal Residence.
25. Manufacturing and Processing - Folio S4-F15-C1
S.125.1 of the Tax Act provides for the taxation of corporations at a reduced rate on their Canadian manufacturing and processing profits. This takes the form of a deduction from Part I tax otherwise payable and is an amount equal to a specified percentage of a corporation’s Canadian manufacturing and processing profits (subject to certain adjustments). This Chapter provides comments on various components of the calculation and discusses activities that are and are not considered to be manufacturing or processing.
Currently, the federal manufacturing and processing profits deduction rate is equal to the general rate reduction percentage as defined in s. 123.4(1). This means that Canadian manufacturing and processing profits are currently taxed at the same rate as other active business income that is not eligible for the federal small business deduction. A number of provinces and Yukon provide special treatment for income that qualifies for the manufacturing and processing profits deduction (M&P credit). Therefore, the calculation remains relevant in those jurisdictions.
The Chapter also discusses the capital cost allowance (CCA) rules for certain manufacturing and processing machinery and equipment eligible to be included in Class 29, 43, or 53. These CCA classes provide accelerated write-offs for such machinery and equipment depending on when the machinery or equipment is acquired. For CCA information on buildings used for manufacturing or processing, refer to Class 1 on the CRA webpage, Classes of depreciable property.
The final part of the Chapter discusses the federal investment tax credit that may apply to certain new buildings, machinery, and equipment (qualified property) acquired to carry out manufacturing or processing activities in certain regions of Canada.
This Chapter was recently update on February 16, 2017 for relatively minor corrections. In particular, ¶1.28 and 1.32 have been revised to improve consistency in the use of the term “related” versus “associated”.
26. Business Investment Losses - Folio S4-F8-C1
A taxpayer’s business investment loss is basically a capital loss from a disposition of shares in, or a debt owing to the taxpayer by, a small business corporation (SBC) where the disposition is:
- to an arm’s-length person; or
- one to which subsection 50(1) applies.
One-half of this loss is an allowable business investment loss (ABIL).
Unlike ordinary allowable capital losses, an ABIL for a tax year may be deducted from all sources of income for that year. Generally, an ABIL that cannot be deducted in the year it arises is treated as a non-capital loss. A non-capital loss arising from an ABIL can be carried back three years and forward up to ten years to be deducted in calculating taxable income of such other years. Any such loss that is not deducted by the end of the ten-year carryforward period is then treated as a net capital loss, which can be carried forward indefinitely to be deducted against taxable capital gains.
Ordinary allowable capital losses for a tax year may be deducted only from taxable capital gains realized in the year. If the allowable capital losses exceed the taxable capital gains, the difference is a net capital loss which may be carried back three years and forward indefinitely to be deducted only against taxable capital gains.
The purpose of the rules relating to the business investment loss is to encourage investment in SBCs by giving such losses more generous tax treatment than that available for ordinary capital losses.
This Chapter discusses the various provisions of the Act relevant to determining a taxpayer’s ABIL for a tax year and the deductibility of such a loss. The content is technical in nature and some of the topics discussed in this Chapter may not be relevant for all taxpayers. Those wanting a more general overview of the subject matter may prefer to read Guide T4037, Capital Gains. Chart 6 in Chapter 5 of Guide T4037 can be used to compute an ABIL.
The Chapter History notes that an update on February 18, 2017 made the following change:
¶1.42 of the French version has been updated to replace the words “même si ces paiements ont été effectués avant que la société ait cessé d’exploiter son entreprise activement” with “même si la société avait cessé d’exploiter son entreprise activement avant d’effectuer les paiements”.
C. Tax Court Cases
27. Deemed Dividends Arising in Course of Reorganization Re-characterized as Capital Gains
101139810 Saskatchewan Ltd. (“810”) and 101139807 Saskatchewan Ltd. (“807”) (2017 TCC 3) is a decision of the TCC pursuant to which 810 and 807 were reassessed pursuant to s. 55(2) of the Tax Act in respect f dividends that they received as part of a series of transactions designed to extract corporate surplus on a tax-deferred basis prior to and arm’s length sale of shares. By reassessments dated April 10, 2014, the MNR re-characterized the deemed dividends received by the appellants as capital gains the 2009 taxation year ending April 1, 2009 for each of the appellants. Each appellant was reassessed a capital gain of $1,299,999 based on an assumed fair market value of 34 shares in 101008231 Saskatchewan Ltd. (“8231”) held by each appellant to be $1,300,000 as reported by the appellants.
Mr. Case was sole shareholder of 8231 Ltd.at the time he transferred shares in Century Sounds & Music Ltd. (“C Ltd.”) to 8231 Ltd. under s. 85(1) of Tax Act. Mr. Melby and Mr. Rae each worked at C Ltd. None of Messrs. Case, Melby or Rae was related to the others. By late 2008, each of Melby and Rae acquired, indirectly a 33.33 per cent interest in C Ltd. Case then commenced negotiations with Melby and Rae to sell his indirect one-third share to both of them equally, and the parties obtained tax advice to effect the transaction in the most tax effective manner.
As a result of the tax advice received, a number of corporate reorganization transactions were implemented immediately before sale of shares to Melby’s and Rae’s holding companies, including incorporation of 810 and 807 with Case as sole shareholder. 810 and 807 were reassessed under s. 55(2) of Tax Act in respect of the deemed dividends they received as part of series of transactions involving the redemption of 17 Class B Shares each in the capital of 807 and 810 respectively, designed to extract corporate surplus on tax-deferred basis prior to arm’s length sale of shares.
On reassessment, the Minister re-characterized the deemed dividends received by 810 and 807 as capital gains for 2009 taxation year ending April 1, 2009 for each taxpayer.
The court observed that purpose of s.55(2) of the Tax Act is to determine whether the result of a deemed dividend received by corporation under s. 84(3) of the Tax Act was to effect a significant reduction in portion of capital gain that, but for deemed dividend, would have been realized on a disposition at fair market value immediately before dividend. In these facts, the result of the plain and ordinary reading of s. 55(2) of the Tax Act was such that deemed dividends received by 810 and 807 should be recharacterized as capital gains. In order to avoid the application of s. 55(2) of the Tax Act, it was incumbent on 810 and 807 to ensure that dividends deemed paid by 8231 fell within exception provided for by law, but instead, they entered into situation Parliament clearly wanted to be caught by s. 55(2) of the Tax Act.
The impugned transactions were linked to the sale of shares of 810 and 807 to unrelated parties so a related party butterfly was not avialble. In this case, the parties had the opportunity to structure the transactions differently than they did.
The court referenced the 729658 Alberta Ltd. decision of Justice Woods in which individual taxpayers made a s. 85(1) election with their holding companies such that the deemed proceeds to them and the deemed costs to their holding companies of the operating company shares, was the fair market value less the safe income and tax was paid by the individual transferors on a s.85(1) transfer by way of taxable dividends received and only a small portion of the accrued gain, an amount equal to the safe income estimate, was transferred to the holding companies. S. 55(2) applied in 729658 Alberta but the dividend was exempt as a “safe income” dividend under s.55(5)(f).
In contrast, Mr. Case transferred 34 common shares of 8231 to each appellant on a fully tax-deferred basis under s. 85(1) and 8231 transferred to each appellant 17 CSM shares that had the untaxed accrued gain, also on a fully tax-deferred basis, so that 8231 would not realize any capital gain. Therefore, the “unpaid tax on the appreciation of the underlying asset” was avoided by the deemed dividend that arose from the redemption and since the appellants applied the deduction under s. 112, and s. 55(2) was triggered.
The appellants’ argument in this case that the capital gains were not significantly reduced because the capital gain deduction claimed by Mr. Case was relatively minor compared to the total accrued gain (i.e. $238,529/2,600,000 or 10%) was held to be irrelevant: firstly, because Mr. Case and the appellants are not the same taxpayers for purposes of s. 55(2) analysis; and secondly, because s. 55(2) only applies to a corporation.
The details of the transactions are neatly set out in the diagrams found in the Tax Interpretations discussion of 101139810 Saskatchewan Ltd. v. The Queen, 2017 TCC 3.
Mr. Case sold his shares of 807 and 810 to the other two shareholders, and applying the capital gains exemption to a modest portion of the resulting gain. This plan did not work because the purchasers were unrelated, thereby precluding access to the butterfly or s. 55(3)(a) spin-off safe harbour.
CRA assessed 807 and 810, to convert their s. 84(3) deemed dividends realized on the cross-redemption of the shareholdings between them which arose under the butterfly mechanics, into capital gains – subject to deductions of $564,246 for the safe income of 8231 considered to be received by them, notwithstanding that neither had made a s. 55(5)(f) designation.
In this regard, Favreau J stated (at paras. 82-83)stated as follows:
It is well established in Nassau Walnut…that the right to claim the benefit of paragraph 55(5)( f ) is available to taxpayers once the taxpayer is assessed under subsection 55(2).
As the appellants have been reassessed under subsection 55(2), they are entitled to rely on paragraph 55(5)(f) to designate a separate dividend but this dividend election would serve no purpose in this instance as safe income deduction in the amount of $564,246 has been allowed to each appellant… .
Corporate spin offs involving the used of intercorporate dividends and involving arm’s length parties are fraught with problems. Be very careful when mixing tax free intercorporate dividends where arm’s lenght parties hold an interest anywhere in the corporate group.
28. Gold Hedge Profits Form Part of Gross Resource Profits from Producing Gold Mines
Barrick Gold Corporation (2017 TCC 18) deals with the question of a taxyer that was in business of producing and processing gold in Canada. Barrick owned two mines and held 50 per cent interest in third mine, with other 50 per cent interest being held by an arm’s-length party. To hedge risk associated with gold price fluctuations, Barrick would enter into derivatives in respect of anticipated gold production. Barrick then recognized any profits or losses from hedges of gold production as income or loss from business of producing and processing gold, including profits and losses from hedges of gold production in computing gross resource profits for purposes of its resource allowance.
Before 1998, the taxpayer entered into spot forward contracts to hedge some of its anticipated gold production from each mine, including three spot deferred forward contracts to hedge anticipated production of gold from the third mine. On January 19, 1998, Barrick entered into a letter of intent to sell an interest in the third mine to C Inc. On January 20, 1998, Barrick entered into contracts to buy 300,000 ounces of gold at the then current spot price from a third party and on January 27, 1998, Barrick took delivery of the gold and used it to close out forward contracts. On January 27, 1998, Barrick entered into a purchase agreement with C Inc. and sold its interest in the third mine.
The sale agreement provided that the transfer of Barrick’s interest was deemed to have occurred on January 1, 1998 and that Barrick was not entitled to production or revenue after January 1, 1998 from its transferred interest except to extent of Barrick’s participation right in mine. No amount was paid in respect of its participation right in 1998. Barrick realized a profit of $56,679,461 when it closed out forward contracts.
For tax filing purposes, Barrick included its profit on forward contracts as well as amount reported this amount on its financial statements as gold sales revenue for 1998 and computed its resource allowance on the combined amount. The Minister allowed the inclusion of the gold sales revenue in the calculation of its gross resource profits but disallowed inclusion of the profits from its forward contracts. The TCC reversed this treatment on appeal finding that the treatment for accounting purposes of a gain realized by the taxpayer from closing out hedges was not relevant to whether the gain was a profit from the taxpayer’s gold production business. Paris J stated (at paras.44 to 46) in allowing the appeal:
 The test for whether income earned by a taxpayer falls within the definition of gross resource profits is a legal test and has been decided in 3850625 Canada Inc. Thus there is no need to resort to accounting principles to assist in the required determination and it is immaterial how the profit earned on the Forward Contracts was required to be treated for financial statement purposes.
 Given my conclusion that the Forward Contracts did not cease to be hedges prior to being closed out, it is not necessary to deal with the Respondent’s further argument that the Contracts should be considered “stand-alone transactions” and that the gold used to satisfy the Contracts was produced by third parties. I would only note that there is no need for a taxpayer to fulfill a hedge contract with production from its own mine in order to have a valid hedge: Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20 at para 52.
 For all of these reasons, the appeal is allowed and the matter is referred back to the Minister for reassessment on the basis that the profit earned by the Appellant on the Forward Contracts be included in the Appellant’s gross resource profit for the purposes of determining its resource allowance for 1998.