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Canadian government moves to implement long overdue technical tax amendments

On October 24, 2012, the Minister of Finance tabled a detailed Notice of Ways and Means Motion (“NWMM”) to implement technical tax amendments. Many of the amendments were proposed approximately 10 years ago. We have previously written on how the Government of Canada develops and implements tax legislation in our February 1, 2012 blog. As we noted in that blog, the fact that there has been proposed tax legislation in existence for such a long time has been challenging. The long outstanding proposed legislation appears to be close to being passed into law and is very welcome news.

The NWMM is only 947 pages long. Wow… that’s it? While that is not quite to the standard of Tolstoy’s War and Peace, it certainly puts Hemingway’s The Old Man and the Sea to shame. We should be able to get through that over a nice glass (case) of wine. The Explanatory Notes are only 521 pages… thank goodness… anything over 600 pages would have been too much wine! The approximately 1,500 pages of material certainly provides “black and white” new rules… or as we tax practitioners say “… 50 shades of grey…“.

Joking aside (yes… that is as good as it gets for humour in our tax world), the NWMM contains a tremendous amount of proposed legislation. Accordingly, there is no way that we could possibly give justice to how massive the proposals are with this short discussion.

Notwithstanding, here are some of the highlights:

Restrictive covenants – Proposed section 56.4 and related amendments

The taxation of restrictive covenant receipts was first proposed on October 7, 2003. Yes, that is nine years ago. Since that time, there have been a number of changes to the proposed legislation. Our firm wrote a paper on the proposed amendments for the Canadian Tax Foundation’s 2008 National Conference and you will find it here. We also wrote about it in our blog of July 20, 2010 given that the Department of Finance released additional amendments to proposed section 56.4 after we wrote our paper. The October 24, 2012 NWMM proposes even further amendments to these rules. For the technically inclined, the following appears to be some of the amendments that we have noted in our preliminary review:

  1. There are changes to the exception to the full income inclusion rule under proposed paragraph 56.4(3)(c).
  2. The previous exception to the “deemed receipt” rule under former proposed subsections 56.4(8) and (8.1) appears to have been collapsed into the new version of subsection 56.4(7). The new expanded proposed subsection 56.4(7) is much more voluminous and will need some further digestion in the days to come to determine its proposed impact.
  3. The rules under former proposed subsection 56.4(9) appears to have been eliminated in its entirety. Former proposed subsection 56.4(9) provided rules that would have applied if section 68 (the “deemed receipt” provision) applies to a taxpayer’s grant of a restrictive covenant solely because all or a portion of the consideration in respect of the restrictive covenant is received or receivable by a non-arm’s length individual, or by another taxpayer in which the non-arm’s length individual holds, directly or indirectly, an interest. This elimination is a very interesting development.
  4. Changes to the various election mechanisms… practitioners will need to carefully review how elections are to be filed since the latest amendments – including the “coming–into-force” provisions – have changed from the last round of amendments.

Non-resident trust proposals

These proposals were first introduced in the 1999 Federal Budget and now appear to nearing the end of the road. If passed, it will significantly broaden the taxation impact of Canadians who directly or indirectly are involved with non-resident trusts.

Changes to EPSPs and RCAs

We previously blogged about these changes in our April 5, 2012 blog and the government is moving to pass these proposals into law.

Foreign affiliates

Changes to the taxation of foreign affiliates has been proposed for quite some time. While beyond the scope of this blog, readers should be aware that significant changes are being made.

Significant trust amendments

Again, well beyond the scope of this update, there are numerous technical amendments to the taxation of personal and other trusts.

Shareholder loan amendments

Numerous technical amendments to the taxation treatment of direct or indirect shareholder loans are proposed.

Deductibility of contingent amounts – New section 143.4

We previously discussed these proposals in our March 21, 2011 blog. New section 143.4 will have a significant impact on the deductibility of certain expenditures.

Revisions to the personal services business rules

We previously discussed these proposals in our November 1, 2011 blog. These proposals will have a dramatically negative impact for persons who carry on a personal services business through a corporation.

The aggressive tax reporting rules

We have previously discussed these proposed reporting rules in our March 5, 2010 and October 14, 2010 blogs. These rules will have a significant impact on the tax community.

Other

There are so many other technical amendments that it is impossible to detail all of them here. While many of the proposed amendments are controversial, it will be welcome to obtain certainty on the passing of the proposed amendments so that we can give sound tax advice as opposed to dealing with the uncertainty of proposals that are not yet passed but have retroactive effect.

The tax professionals at Moodys Tax Advisors would be pleased to discuss these proposals with you.