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Canadian Federal Budget 2016


Capital Gains Exemption for Sale of Private Corporation Shares and Real Estate

Budget 2016 announces that the government will not proceed with the 2015 budget proposal that would have exempted from tax certain capital gains from the disposition of private corporation shares or real estate, provided that the cash proceeds were donated to a registered charity within 30 days.

Administrative Measures

Additional Funding for CRA

Budget 2016 proposes to invest additional funds for the CRA for the purposes of improving service levels, cracking down on tax evasion, combatting tax avoidance and enhancing tax collections. In particular, over the next five years, Budget 2016 proposes to invest:

  • $185.5 million for the CRA to address the government’s commitment to “service excellence,” including enhanced telephone services, a revamp of written correspondence and timely resolution of objections.

  • $444.4 million to be used towards hiring additional auditors and specialists; developing robust business intelligence infrastructure; increasing verification activities; and improving the quality of investigative work that targets criminal behaviour. These measures are expected to bring in additional federal revenues of $2.6 billion over five years.

  • $351.6 million to improve the CRA’s ability to collect outstanding debts. It is anticipated that this proposal will lead to the collection of an additional $7.4 billion in tax debt over five years.

GST/HST and Excise Measures

Closely Related Test

Under sections 150 and 156 of the Excise Tax Act, members of a group of closely related corporations or partnerships can make an election under which they are not required to charge GST/HST on certain intragroup supplies that would otherwise be subject to GST/HST.

Budget 2016 proposes to add the requirement that, in order to fit within these rules, a parent corporation or partnership of a subsidiary corporation must hold and control at least 90% of the votes in respect of every corporate matter of the subsidiary corporation (with limited exceptions) in order to be considered to be closely related.

This measure will apply generally as of March 22, 2017, and will also apply effective March 23, 2016, for determining whether the closely related test is met in respect of elections under sections 150 and 156 of theExcise Tax Act that are filed, and take effect, after March 22, 2016.

Application of GST/HST to Cross-Border Reinsurance

The GST/HST imported supply rules for financial institutions require a financial institution, including an insurer, with a presence outside Canada (e.g., a branch or subsidiary) to pay GST/HST, on a self-assessment basis, on certain expenses incurred outside Canada that relate to its Canadian activities. Considerable uncertainty has existed with respect to the application of these rules to reinsurance premiums paid by a primary insurer to a reinsurer. In response to industry concerns, in January 2015, the CRA issued GST/HST Notice No. 287, setting out its administrative positions and the Department of Finance’s policy intentions regarding the application of these imported supply rules. Budget 2016 follows up on that Notice by proposing amendments in this area. In particular, Budget 2016 proposes to clarify that two specific components of the premium for imported reinsurance services, ceding commissions and the margin for risk transfer, do not form part of the amount that is subject to self-assessment. The budget also proposes amendments to set out specific conditions under which the special rules for insurers do not impose GST/HST on reinsurance premiums charged by a reinsurer to a primary insurer.

This measure will apply as of the introduction of the special GST/HST imported supply rules for financial institutions (i.e., in respect of any specified year of a financial institution that ends after November 16, 2005). Further, this measure will allow a financial institution to request a reassessment by the CRA of the amount of GST/HST owing by the financial institution under the special GST/HST imported supply rules (as well as any related penalties or interest) for a past specified year, but solely for purposes of taking into account the effect of this measure. A financial institution will have until the day that is one year after the day that these amendments receive Royal Assent to request such a reassessment.

De Minimis Financial Institutions

Financial institutions are subject to special GST/HST rules that, among other things, impose special reporting requirements and restrict the ability of such entities to recover GST/HST paid on certain of their business inputs. This applies to traditional financial institutions, such as banks, insurance companies and trust companies, as well as other entities, referred to as “de minimis financial institutions” that are deemed to be financial institutions for GST/HST purposes. A person can be deemed to be a financial institution for a taxation year if it has earned more than $1 million in interest income in respect of bank deposits in its preceding taxation year.

Budget 2016 proposes that interest earned in respect of demand deposits, as well as term deposits and guaranteed investment certificates issued for 364 days or less, not be included in determining whether a person exceeds the $1 million threshold.

This measure will apply to taxation years beginning after March 21, 2016, and to fiscal years that begin before March 22, 2016, for the purposes of determining if the person is required to file the Financial Institution GST/HST Annual Information Return.

Exported Call Centre Services

Budget 2016 proposes, generally, to add to the list of zero-rated supplies, the exported supply of a call centre service, as long as the service is supplied to a non-resident person that is not registered for GST/HST and it can reasonably be expected at the time that the supply is made that the technical or customer support is to be rendered primarily to individuals who are outside Canada at the time that the support is rendered.

This measure is proposed to be effective for supplies made after March 22, 2016, or to supplies made before such date if no amount of GST/HST was charged, collected or remitted thereon prior to March 22, 2016.

Reporting of Grand parented Housing Sales

Under the transitional rules that applied when a province either joined the HST since 2010 or increased its HST rate, certain sales of newly constructed or substantially renovated homes were relieved from the application of the provincial component of the HST or the increased HST rate, as the case may be. In respect of these grandparented sales, builders have certain reporting obligations. Budget 2016 proposes to simplify builder reporting by limiting the reporting requirement to those grandparented housing sales for which the consideration is equal to or greater than $450,000, and providing builders with an opportunity to correct past misreporting and avoid potential penalties by allowing them to elect to report all past grand parented housing sales for which the consideration was equal to or greater than $450,0000.

This measure will apply in respect of any reporting period of a person that ends after March 22, 2016. In addition, if the above election is made, the measure will also apply to any supply of grand parented housing in respect of which the federal component of the HST became payable on or after July 1, 2010. Builders will generally have between May 1, 2016, and December 31, 2016, to make the election.

GST/HST on Donations to Charities

Budget 2016 proposes that, in cases where a person makes a donation to a charity and, in return, receives property or services on which the charity is required to charge GST/HST, provided that an income tax receipt may be issued for a portion of the donation, only the value of the property or services, and not the full value of the donation, will be subject to GST/HST.

This proposal will apply to supplies of property or services made after March 22, 2016. In addition, transitional relief will be provided in respect of supplies that were made by a charity between December 21, 2002 (when the income tax split-receipting rules came into effect) and March 22, 2016 where the charity did not collect GST/HST on the full value of donations made in exchange for an inducement.

Health Measures

Budget 2016 proposes to add insulin pens, insulin pen needles and intermittent urinary catheters to the list of zero-rated medical devices, for a supply of such devices made after March 22, 2016, or made before such date if no amount of GST/HST was charged, collected or remitted thereon prior to March 22, 2016.

Budget 2016 also proposes to apply GST/HST on supplies, made after March 22, 2016, of purely cosmetic procedures provided by all suppliers. Cosmetic procedures will continue to be exempt if paid for by a provincial health plan or if required for medical or reconstructive purposes.

Previously Announced Measure Relating to the GST/HST Joint Venture Election

Budget 2016 confirms the government’s intention to proceed with the measure to expand the scope of the GST/HST joint venture election, which has been promised in previous budget proposals.

Excise Tax – Diesel and Aviation Fuel

The Excise Tax Act imposes an excise tax on certain diesel fuel manufactured and delivered in, or imported into, Canada. The Act contains a limited number of provisions that relieve the application of the excise tax on diesel fuel that is used as heating oil or to generate electricity, in specific circumstances.

Budget 2016 proposes to restrict the relief for heating oil to fuel oil that is consumed exclusively for providing heat to a home, building or similar structure and not consumed for generating heat in an industrial process. Budget 2016 also proposes to remove the generation of electricity exemption for diesel fuel used in or by a vehicle, including a conveyance attached to the vehicle, of any mode of transportation.

Excise Duty Measures

Budget 2016 proposes amendments to the Excise Act, 2001, which imposes excise duty on tobacco products, spirits and wine. The proposed measures will enhance certain security and collection rules in that Act.

Outstanding Tax Measures

Budget 2016 confirms the government’s intention to proceed with certain tax and related measures in the following areas, which were originally proposed in previous budgets, during the last Parliament or in the current session of Parliament but have not yet been legislated:

  • the common reporting standard for the automatic exchange of financial account information between tax authorities

  • legislative proposals on the income tax rules for certain trusts and their beneficiaries

  • “synthetic equity arrangements” under the dividend rental arrangement rules

  • the conversion of capital gains into tax-deductible inter-corporate dividends (section 55 of the ITA)

  • the offshore reinsurance of Canadian risks

  • alternative arguments in support of an assessment

  • an exception to the withholding tax requirements for payments by qualifying non-resident employers to qualifying non-resident employees

  • the repeated failure to report income penalty

  • the acquisition or holding of limited partnership interests by registered charities

  • the qualification of certain costs associated with undertaking environmental studies and community consultations as Canadian exploration expenses

  • the sharing of taxpayer information within the CRA to facilitate the collection of certain non-tax debts and with the Office of the Chief Actuary

  • the tax deferral in respect of the commercialization of the Canadian Wheat Board

  • the relief of the GST/HST for feminine hygiene products

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