Federal Budget 2013 - Improving The Integrity Of The Tax System

The Honourable James Flaherty, Minister of Finance, tabled the government's 2013 Federal Budget (Budget 2013) on March 21, 2013 (Budget Day). According to Budget 2013, the government remains on track to return to balanced budgets by 2015-2016, despite continued global economic uncertainty. While still continuing to focus on controlling direct program spending by government departments, the government's priorities in Budget 2013 are to connect Canadians with available jobs by equipping them with the skills and training to obtain high-quality well-paying jobs, to help manufacturers and businesses succeed in the global economy by enhancing the conditions for creating and growing businesses, to create a new infrastructure plan focused on projects that create jobs and economic growth, and to invest in world-class research and innovation.

Budget 2013 proposes a number of significant business income tax, international tax, personal income tax and GST/HST measures which are discussed below. The government's intentions in introducing these measures are to improve the integrity of the tax system, close tax loopholes, strengthen compliance, clarify tax rules, and combat international tax evasion and aggressive tax avoidance.

BUSINESS INCOME TAX MEASURES

CORPORATE LOSS TRADING

The government has indicated that despite the various provisions meant to curtail the inappropriate trading of tax attributes between unrelated parties, transactions intended to circumvent these provisions continue to be undertaken. Existing provisions of the Income Tax Act allow the government to challenge such transactions, but the process is both time-consuming and costly.

Budget 2013 proposes to introduce a new anti-avoidance rule to support existing restrictions on the trading of tax attributes, which generally apply on the acquisition of control of a corporation. This new measure will apply to deem an acquisition of control (and thus a triggering of the restrictions) to occur where a person or group of persons acquire shares of a corporation representing more than 75% of the fair market value of all the shares of the corporation without otherwise acquiring voting control of the corporation. This anti-avoidance rule will only apply in circumstances where it is reasonable to conclude that one of the main purposes for not acquiring control of the corporation was to avoid existing restrictions on the trading of tax attributes. Additional measures are also proposed to ensure that this proposed anti-avoidance measure is not circumvented.

The government projects that the proposed measures will generate approximately $95 million in tax revenue over a period of 5 years. Using a 15% federal corporate tax rate, this could affect the usage of approximately $630 million in corporate losses.

This new anti-avoidance rule will apply in the case of shares of a corporation acquired after March 20, 2013, unless such shares were acquired pursuant to an agreement in writing entered into before March 20, 2013 under which the parties are obligated to complete the transaction. Parties will generally be considered not to be obligated to complete the transaction where a party may be excused from completing the transaction due to changes to the Income Tax Act.

ACCELERATED CAPITAL COST ALLOWANCE (CCA)

Manufacturing and Processing Machinery and Equipment

Budget 2013 proposes to extend the temporary support for investment in machinery and equipment for the manufacturing and processing sector by an additional two years. Manufacturing and processing machinery and equipment (that would otherwise be included in Class 43) and that is acquired in 2014 or 2015 will qualify for the 50% straight-line CCA rate (subject to the half-year rule), and will be included in Class 29. Eligible assets acquired in 2016 and subsequent years will qualify for the regular 30% declining-balance rate (subject to the half-year rule), and will be included in Class 43.

Clean Energy Generation Equipment

Budget 2013 proposes to expand the biogas production equipment that is eligible for inclusion in Class 43.2 by providing that more types of eligible organic waste can be used in qualifying biogas production equipment and specifically, to include pulp and paper waste and wastewater, beverage industry waste and wastewater (for example, winery and distillery wastes) and separated organics from municipal waste.

Budget 2013 also proposes to expand eligibility under Class 43.2 so that all types of cleaning and upgrading equipment that can be used to treat eligible gases from waste will be included in Class 43.2. These measures will apply in respect of property acquired on or after Budget Day that has not been used or acquired for use before Budget Day.

SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR&ED) PROGRAM

More detailed information will be required to be provided on SR&ED program claim forms about SR&ED program tax preparers and billing arrangements, where one or more third parties have assisted with the preparation of a claim. Also proposed is a new penalty of $1,000 in respect of each SR&ED program claim for which the information about SR&ED program tax preparers and billing arrangements is missing, incomplete or inaccurate. In the case where a third-party SR&ED program tax preparer has been engaged, the SR&ED program claimant and tax preparer will be jointly and severally, or solidarily, liable for the penalty. These changes will apply to SR&ED program claims filed on or after the later of January 1, 2014 and the day of Royal Assent to the enacting legislation.

MINING EXPENSES

Pre-Production Mine Development Expenses

Pre-production mine development expenses are currently treated as Canadian exploration expense (CEE) and may be deducted in full in the year incurred or carried forward indefinitely for use in future years. In contrast, intangible mine development expenses incurred after a mine comes into production are treated as Canadian development expense (CDE) and are deductible at a rate of 30% per year on a declining-balance basis.

Budget 2013 proposes that pre-production mine development expenses, as described in paragraph (g) of the definition CEE in subsection 66.1(6) of the Income Tax Act, be treated as CDE. The transition from CEE to CDE treatment will be phased in over 2015-2017, with pre-production mine development expenses being allocated proportionally to CEE and CDE according to a transitional schedule based on the calendar year in which the expense is incurred, with full phase-in after 2017. This measure will generally apply to expenses incurred on or after Budget Day. The existing CEE treatment for pre-production mine development expenses will be maintained for expenses incurred before Budget Day, and will also apply for expenses incurred before 2017 in specified circumstances.

Accelerated CCA

Most machinery, equipment and structures used to produce income from a mine or an oil or gas project are currently eligible for a CCA rate of 25% on a declining-balance basis. Accelerated CCA is provided for certain assets acquired for use in new mines or eligible mine expansions.

Budget 2013 proposes to phase out the additional allowance available for mining (other than for bituminous sands and oil shale, for which the phase-out will be complete in 2015). The additional allowance will be phased out over the 2017-2020 calendar years. A taxpayer will be allowed to claim a percentage of the amount of the additional allowance otherwise permitted under the existing rules according to a specific transitional schedule. This measure will generally apply to expenses incurred on or after Budget Day. The existing additional allowance will be maintained for eligible assets acquired before Budget Day, and will also apply for such assets acquired before 2018 in specified circumstances.

RESERVE FOR FUTURE SERVICES

To clarify the tax...