2015 Federal Budget: TFSA Contribution is Increased, Corporate Tax Lowered. Transfer Pricing and BEPS: Nothing to “Report”
Here are the highlights of the 2015 Federal Budget.
1) Update on Tax Planning by Multinational Enterprises (2015 Federal Budget, Tax Mesures: Supplementary Information, pp. 471-72). The 2015 Federal Budget explains:
“Members of the Organisation for Economic Co-operation and Development (OECD) and the G-20 are working together on the issues identified in the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS), which was released by the OECD in July 2013. BEPS refers to legal tax planning arrangements undertaken by multinational enterprises that exploit the interaction between domestic and international tax rules to shift profits away from the countries where income-producing activities take place. In 2014, Canada and the other members of the G-20 welcomed the first seven deliverables under the BEPS Action Plan. G-20 Finance Ministers also welcomed the three BEPS-related items delivered in February 2015.
In Economic Action Plan 2014, the Government invited input from stakeholders on issues related to international tax planning in order to inform Canada’s participation in these international discussions. The consultations sought to obtain views on how to ensure tax fairness and better protect the Canadian tax base while maintaining an internationally competitive tax system.
Input from stakeholders on these issues has helped shape Canada’s ongoing participation in the international discussions related to the OECD/G-20 BEPS project. The Government looks forward to the conclusion of the project and to discussions with the international community on the implementation of its recommendations.
The Government will proceed in this area in a manner that balances tax integrity and fairness with the competitiveness of Canada’s tax system. Improving business tax fairness and competiveness has been a central element of the Government’s approach to fostering an environment in which businesses can thrive and compete in a global economy. Taxes are one of the main factors that drive investment decisions and the Government is committed to maintaining Canada’s advantage as an attractive destination for business investment.”
2) Update on the Automatic Exchange of Information for Tax Purposes. The 2015 Federal Budget explains (pp. 472-73):
“G-20 Leaders committed in 2013 to the automatic exchange of tax information in respect of financial accounts as the new global standard. In November 2014, Canada and the other G-20 countries endorsed a new common reporting standard for automatic information exchange developed by the Organisation for Economic Development and Co-operation and committed to a first exchange of information by 2017 or 2018. G-20 Finance Ministers committed in February 2015 to work towards completing the necessary legislative procedures within the agreed timeframe.
Under the new standard, foreign tax authorities will provide information to the Canada Revenue Agency relating to financial accounts in their jurisdictions held by Canadian residents. The Canada Revenue Agency will, on a reciprocal basis, provide corresponding information to the foreign tax authorities on accounts in Canada held by residents of their jurisdictions. In order for the Canada Revenue Agency to obtain the information to be exchanged, the common reporting standard will require financial institutions in Canada to implement due diligence procedures to identify accounts held by non-residents and report certain information relating to these accounts to the Agency. It will not require reporting on accounts held by residents of Canada with foreign citizenship. The standard includes important safeguards to protect taxpayer confidentiality and ensure that the exchanged information is used only by tax authorities and only for tax purposes.
Canada proposes to implement the common reporting standard starting on July 1, 2017, allowing a first exchange of information in 2018. As of the implementation date, financial institutions will be expected to have procedures in place to identify accounts held by residents of any country other than Canada and to report the required information to the Canada Revenue Agency. As the Canada Revenue Agency formalizes exchange arrangements with other jurisdictions, having been satisfied that each jurisdiction has appropriate capacity and safeguards in place, the information will begin to be exchanged on a reciprocal, bilateral basis. Draft legislative proposals will be released for comments in the coming months.
Implementation of the common reporting standard will further the Government’s commitment to tax fairness and responsible fiscal management.”
3) Withholding for Non-Resident Employers (pp. 467-69). The 2015 Federal Budget explains:
“In order to reduce the administrative burden of businesses engaged in cross-border trade and commerce, Budget 2015 proposes to provide an exception to the withholding requirements for payments by qualifying non-resident employers to qualifying non-resident employees. An employee will be a qualifying non-resident employee in respect of a payment if the employee:
- is exempt from Canadian income tax in respect of the payment because of a tax treaty; and
- is not in Canada for 90 or more days in any 12-month period that includes the time of the payment.
In order to be a qualifying non-resident employer, an employer (other than a partnership) must be resident in a country with which Canada has a tax treaty. In order for an employer that is a partnership to qualify, at least 90% of the partnership’s income for the fiscal period that includes the time of the payment must be allocated to persons that are resident in a treaty country. In all cases, the employer must not carry on business through a Canadian permanent establishment of the employer in its fiscal period that includes the time of the payment and the employer must be certified by the Minister of National Revenue at the time of the payment. Certification may be denied or revoked if the employer does not meet the conditions described above or fails to comply with its Canadian tax obligations.”
4) Reporting Requirements (T1135) for Foreign Assets. The 2015 Federal Budget explains (p. 469):
“Under the revised form being developed by the Canada Revenue Agency, if the total cost of a taxpayer’s specified foreign property is less than $250,000 throughout the year, the taxpayer will be able to report these assets to the Canada Revenue Agency under a new simplified foreign asset reporting system. The current reporting requirements will continue to apply to taxpayers with specified foreign property that has a total cost at any time during the year of $250,000 or more.”
5) Captive Insurance. The 2015 Federal Budget explains (pp. 470-71):
“Budget 2015 proposes to amend the existing anti-avoidance rule in the FAPI regime that relates to the insurance of Canadian risks. This amendment is intended to ensure that profits of a Canadian taxpayer from the insurance of Canadian risks remain taxable in Canada. In particular, it will be amended so that:
- a foreign affiliate’s income in respect of the ceding of Canadian risks is included in computing the affiliate’s FAPI; and
- for these purposes, when an affiliate cedes Canadian risks and receives as consideration a portfolio of insured foreign risks, the affiliate is considered to have earned FAPI in respect of the ceding of the Canadian risks in an amount equal to the difference between the fair market value of the Canadian risks ceded and the affiliate’s costs in respect of having acquired those Canadian risks.
This measure will apply to taxation years of taxpayers that begin on or after Budget Day.
The Government invites interested stakeholders to submit comments on this measure by June 30, 2015. Please send your comments to firstname.lastname@example.org.”
1) The TFSA annual contribution limit will be $10,000$ starting on January 1st, 2015. The amount will not be indexed to inflation in future years (2015 Federal Budget, Tax Mesures: Supplementary Information, p. 442).
2) The minimum withdrawal requirements for RRIFs is reduced (pp. 446-48).
3) Repeated Failure to Report Income Penalty. The 2015 Federal Budget explains (p. 450):
“Budget 2015 proposes to amend the repeated failure to report income penalty to apply in a taxation year only if a taxpayer fails to report at least $500 of income in the year and in any of the three preceding taxation years. The amount of the penalty will equal the lesser of:
- 10 per cent of the amount of unreported income; and
- an amount equal to 50 per cent of the difference between the understatement of tax (or the overstatement of tax credits) related to the omission and the amount of any tax paid in respect of the unreported amount (e.g., by an employer as employee withholdings).
No changes are proposed to the gross negligence penalty, which will continue to apply in cases where a taxpayer fails to report income intentionally or in circumstances amounting to gross negligence.
This measure will apply to the 2015 and subsequent taxation years.”
4) Alternative Arguments in Support of Assessments. The 2015 Federal Budget explains (p. 451):
“Le budget de 2015 propose que la Loi de l’impôt sur le revenu soit modifiée de façon à préciser que l’Agence du revenu du Canada et les tribunaux peuvent augmenter ou rajuster à tout instant un montant inclus dans une cotisation qui fait l’objet d’une opposition ou d’un appel, pourvu que le montant total de la cotisation n’augmente pas. Des modifications semblables sont proposées à la partie IX de la Loi sur la taxe d’accise (relativement à la taxe sur les produits et services/taxe de vente harmonisée) et à la Loi de 2001 sur l’accise (relativement aux droits d’accise sur les produits du tabac et les produits alcoolisés) en vue de contribuer à garantir l’uniformité des mesures administratives dans les lois fiscales fédérales.”
Cette nouvelle disposition de la LIR l’harmonisera avec une décision récente rendu par les tribunaux canadiens sur cette question.
5) Small Business Tax Rate. The 2015 Federal Budget explains (pp. 457-58):
“To further reduce taxes paid by small businesses, Budget 2015 proposes a two-percentage-point decrease in the 11-per-cent small business tax rate. The reduction will be implemented as follows:
- effective January 1, 2016, the rate will be reduced to 10.5 per cent;
- effective January 1, 2017, the rate will be reduced to 10 per cent;
- effective January 1, 2018, the rate will be reduced to 9.5 per cent; and
- effective January 1, 2019, the rate will be reduced to 9 per cent.
The reduction in the small business rate will be pro-rated for corporations with taxation years that do not coincide with the calendar year.
In conjunction with the proposed reduction in the small business tax rate, Budget 2015 also proposes to adjust the gross-up factor and DTC rate applicable to non-eligible dividends (generally dividends distributed from corporate income taxed at the small business tax rate). Specifically, Budget 2015 proposes to adjust the gross-up factor applicable to non-eligible dividends from 18 per cent to 17 per cent effective January 1, 2016, 16 per cent effective January 1, 2018 and 15 per cent effective January 1, 2019. The corresponding DTC rate will also be adjusted, moving from 13/18 to 21/29 of the gross-up amount effective January 1, 2016, 20/29 of the gross-up amount effective January 1, 2017, and 9/13 of the gross-up amount effective January 1, 2019.
Expressed as a percentage of the grossed-up amount of a non-eligible dividend, the effective rate of the DTC in respect of such a dividend will be 10.5 per cent in 2016, 10 per cent in 2017, 9.5 per cent in 2018 and 9 per cent after 2018, in line with the proposed reductions in the small business tax rate.”
This will compensate for the corporate tax increase in the 2015 Quebec Budget of March 26, 2015.
6) Synthetic Equity Arrangements. The 2015 Federal Budget announces a public consultation on the subject (pp. 461-63):
“To protect the Canadian tax base, Budget 2015 proposes to modify the dividend rental arrangement rules to deny the inter-corporate dividend deduction on dividends received by a taxpayer on a Canadian share in respect of which there is a synthetic equity arrangement. A synthetic equity arrangement, in respect of a share owned by a taxpayer, will be considered to exist where the taxpayer (or a person that does not deal at arm’s length with the taxpayer) enters into one or more agreements that have the effect of providing to a counterparty all or substantially all of the risk of loss and opportunity for gain or profit in respect of the share. Where a person that does not deal at arm’s length with the taxpayer enters into such an agreement, a synthetic equity arrangement will be considered to exist if it is reasonable to conclude that the non-arm’s length person knew, or ought to have known, that the effect described above would result.
In general terms, an exception to the proposed dividend rental arrangement rule will be provided where a taxpayer can establish that no tax-indifferent investor has all or substantially all of the risk of loss and opportunity for gain or profit in respect of the share by virtue of a synthetic equity arrangement or another equity derivative that is entered into in connection with the synthetic equity arrangement. For this purpose, a taxpayer will be presumed to qualify for this exception if it obtains representations from its counterparty to the synthetic equity arrangement that the counterparty is not a tax-indifferent investor and either:
- does not reasonably expect to eliminate all or substantially all of its risk of loss and opportunity for gain or profit in respect of the share; or
- has transferred all or substantially all of its risk of loss and opportunity for gain or profit in respect of the share to its own counterparty and has obtained the representations described above from that counterparty.
If the representations are later determined to be inaccurate, the arrangement will be treated as a dividend rental arrangement.
This measure will not apply to agreements that are traded on a recognized derivatives exchange unless it can reasonably be considered that the taxpayer knows, or ought to know, the identity of the counterparty to the agreement.
To support this measure, an anti-avoidance rule will deem certain agreements that do not meet the definition “synthetic equity arrangement” to be dividend rental arrangements. Specifically, agreements that have the effect of eliminating all or substantially all of the taxpayer’s risk of loss and opportunity for gain or profit in respect of a share will be deemed to be a dividend rental arrangement if one of the purposes of the series of transactions that includes these agreements is to avoid the measure.
This measure will apply to dividends that are paid or become payable after October 2015.”
Stakeholders are invited to submit comments by August 31, 2015 at email@example.com.
7) Small business deduction: a consultation on active versus investment business is announced (pp. 466-67).
8) The design of the Eligible capital property new regime is still in an ongoingprocess (p. 467).
The complete 2015 Federal Budget is available here.
Notices of Ways and Means Motions are available here.
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