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Finance Releases Draft Legislation for Budget Bill #2

Finance Releases Draft Legislation for Budget Bill #2

Measures affect partnership at-risk rules & passive investment income rules, among other things


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You may be affected by draft legislation released by Finance on July 27, 2018, which implements the remaining income tax measures from the 2018 federal budget, as well as one previously announced measure (for more on the 2018 budget, see TaxNewsFlashCanada 2018-06 "2018 Federal Budget Highlights")). The 23-pages of draft legislation (along with 59-pages of explanatory notes) includes measures to accelerate the filing deadline for T1134 returns to six months after the taxpayer's year-end (from 15 months), effective for taxation years beginning after 2019 (as originally proposed in the 2018 budget). The draft legislation also includes the changes to the limited partnership at-risk rules, which were originally proposed in the budget, as well as new provisions related to the passive investment income rules explaining how to allocate losses when determining refundable dividend tax on hand (RDTOH) balances, as a consequence of the new eligible and non-eligible RDTOH pools.

Finance also released 11-pages of draft legislative proposals and 18-pages of explanatory notes for various sales and excise tax changes, as well as a consultation paper related to additional proposed changes to the GST/HST rules for holding corporations.

The draft legislation is open for comment until September 10, 2018.

Income tax changes
The draft legislation includes the following outstanding corporate tax measures proposed in the 2018 budget:

  • Changes to the at-risk rules for limited partnerships 
  • Changes related to synthetic equity arrangements and securities lending arrangements
  • Amendments to the dividend stop-loss rules on share repurchase transactions 
  • Certain international tax changes, including amendments related to cross-border surplus stripping using partnerships and trusts
  • Foreign affiliate proposals relating to investment businesses, controlled foreign affiliate status, trading or dealing in indebtedness, reassessments and reporting requirements
  • Amendments affecting the thin capitalization rules; specifically, clarifying the definition of "equity amount" in subsection 18(5) to exclude certain contributed surplus
  • Amendments to limit the amount of contributed surplus that can be converted to paid up capital without triggering a deemed dividend.

New rules for allocating losses when determining RDTOH
New measures explain how corporations must determine their eligible RDTOH if they use non-capital losses or farm losses to offset their Part IV tax payable for the year, where the Part IV tax payable would have otherwise increased the corporation's eligible and non-eligible RDTOH. Under this provision a corporation's non-capital loss and farm loss, claimed to reduce Part IV taxes payable, will first reduce the amount that would have been added to its non-eligible RDTOH.

This measure applies to taxation years that begin after 2018.

Other 2018 budget measures
Other 2018 budget measures in the draft legislation include:

  • Enhanced reporting requirements for trusts (applies to taxation years that end after December 30, 2021)
  • An accelerated filing deadline for T1134's (as noted above, the proposed due date for taxation years that begin after 2019 is only six months after the taxpayer's year-end)
  • An extended reassessment period for taxpayers who challenge requirements for information or compliance orders
  • Extension of reassessment periods for loss-carryback adjustments resulting from a CRA reassessment regarding transactions that involve taxpayers and non-arm's length non-resident persons.

Personal tax measures from the 2018 federal budget included in the draft legislation relate to:

  • Improving access to the Canada Worker's Benefit
  • The deductibility of employee contributions to the enhanced portion of the Quebec Pension Plan.

Previously announced measures
The draft legislation also includes revised technical income tax amendments relating to a previously announced measure, regarding corporate divisions under foreign laws (note these changes to subsection 15(1.4), new 15(1.5) and related changes to Regulation 5907 are, for the most part, deemed to have come into force on either October 24, 2012, or in respect of divisions that occur after October 23, 2012, according to the proposed legislation).

The draft legislation does not include 2018 federal budget changes for health and welfare trusts.

Sales and excise tax changes
The draft tax legislative proposals include proposed GST/HST and excise tax measures that:

  • Amend the GST/HST rules that determine whether a holding corporation is eligible to claim ITCs in some circumstances
  • Expand the excise rules to allow a vendor to apply for a refund for excise tax paid on diesel fuel used to generate electricity in specific circumstances if various conditions are fulfilled
  • Limit the GST/HST rebate for printed books acquired or imported by qualifying entities in certain circumstances
  • Extend the reassessment periods in certain specific circumstances.

Finance also released a consultation paper seeking input regarding additional changes to the GST/HST rules for holding corporations. The two changes under consideration would change the "related test" to a "closely-related test" and expand the application of the rules to include partnerships and trusts. The deadline for comments on the consultation paper is September 28, 2018.

This draft legislation has not yet been tabled in a bill.

For more information, contact your KPMG adviser.

Information is current to July 31, 2018. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500

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