2016 Federal Budget - Draft Legislation Released | KPMG | CA

2016 Federal Budget - Draft Legislation Released

2016 Federal Budget - Draft Legislation Released

Finance has released draft legislative proposals to implement certain outstanding measures that were originally announced in the 2016 federal budget.


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The draft legislation includes outstanding income tax measures from the 2016 federal budget, including changes to the eligible capital property (ECP) legislation, details on country-by-country reporting and the extension of the back-to-back loan rules, among others.

The proposals were released on July 29, 2016 and are contained within 59 pages of draft legislation and 148 pages of explanatory notes. Finance is accepting comments on the draft legislative proposals until September 27, 2016.

Small business tax changes

The draft legislation includes legislation related to the 2016 federal budget NWMM on:

  • Repealing the ECP regime
  • Multiplication of small business deduction
  • Avoidance of the business limit and taxable capital limit in subsection 256(2)
  • Treatment of life insurance proceeds.

Country-by-country reporting
The draft legislation sets out the country-by-country reporting requirements, as developed by the Organisation for Economic Co-operation and Development (OECD), and applies to an multinational enterprise (MNE) group that has total consolidated group revenue of €750 million or more in a fiscal year. The reporting will also apply to reporting fiscal years of MNE groups that begin on or after January 1, 2016. According to the draft legislation, the report must be generally filed by 12 months after the last day of an MNE group's reporting fiscal year.

The draft legislation also provides that the ultimate parent entity of an MNE group is generally required to file a country-by-country report if it is resident in Canada in the reporting fiscal year. A Canadian-resident "constituent entity" of an MNE group must also file the report in certain circumstances. A constituent entity is a business entity within an MNE group that is included in the group's consolidated financial statements for financial reporting purposes (or would be required to be included if equity interests in any of the group's business entities' were traded on a public securities exchange). It also includes any business entity that is excluded from the MNE group's consolidated financial statements solely for size or materiality reasons.

A Canadian-resident constituent entity must file the report where:

  • The ultimate parent entity is not obligated to file a country-by-country report in its jurisdiction of tax residence
  • The ultimate parent entity's tax jurisdiction does not have a qualifying competent authority agreement in effect with Canada before the country-by-country report for the reporting fiscal year is due
  • The CRA has notified the constituent entity of the systemic failure of the jurisdiction of tax residence of the ultimate parent entity (i.e., it has suspended automatic exchange or has persistently failed to automatically provide country-by-country reports in its possession to Canada).

Where there is more than one constituent entity (that is not the ultimate parent entity) of an MNE group in Canada, the draft legislation allows one constituent entities to be designated to file on behalf of other constituent entities in an MNE group.

The draft legislation also allows a surrogate parent entity to file a country-by-country report instead of the ultimate parent entity where the surrogate parent's jurisdiction:

  • Requires filing of country-by-country reports
  • Has a qualifying competent authority agreement in effect to which Canada is a party
  • Is not in a position of systemic failure, and
  • Has been notified by the surrogate parent entity that it is filing as the surrogate parent entity.

The draft legislation also extends the failure to file penalty to persons and partnerships who fail to file the country-by-country return.

International tax changes

Extension of the back-to-back rules
The draft legislation includes new rules on the back-to-back rules that were not detailed in the 2016 federal budget NWMM. The rules extend the back-to-back loan rules to certain back-to-back loan arrangements, character substitutions, and rents, royalties and other similar payments.

Debt parking to avoid foreign exchange gains
The draft legislation introduces debt parking rules that were not detailed in the 2016 federal budget NWMM. The rules are intended to counter the "parking" of a debt obligation denominated in a foreign currency that is undertaken to avoid the realization of a foreign exchange gain on the repayment of the debt obligation.

Cross-border surplus stripping
The draft legislation also includes legislation that is substantially the same as the 2016 federal budget NWMM on cross-border surplus stripping (section 212.1).

Personal tax measures

Taxation of switch fund shares
The draft legislation includes new rules to ensure the appropriate recognition of capital gains on mutual fund organizations that are organized as multi-class funds (often called "switch funds"). The 2016 federal budget originally stated that the rules were intended to apply to dispositions that occur after September 2016. However, the draft legislation indicates that the new rules will apply to transactions and events that occur after 2016.

Sales of linked notes
The draft legislation expands the rules on sales of linked notes that were introduced in the 2016 federal budget NWMM. The amendments will apply to transactions that occur after September 2016.

Common reporting standard
The draft legislation clarifies some aspects of the common reporting standard rules. Specifically, the draft legislation eliminates the ability for financial institutions to apply the due diligence procedures for pre-existing individual accounts to new individual accounts, effective on Royal Assent.

Business tax changes

Emissions trading regimes
The draft legislation introduces new section 27.1 to provide rules relating to the tax treatment of transactions involving emission allowances. The new section generally applies in respect of emissions allowances acquired in taxation years that begin after 2016. However, a taxpayer can elect in their income tax return for the 2016 and 2017 taxation years to have new section 27.1 apply to taxation years that end after 2012.

Other legislation
The draft legislation also includes legislation that is substantially the same as the 2016 federal budget NWMM on valuation for derivatives. In addition, the draft legislation amends the Income Tax Regulations to implement expanding tax support for clean energy (expanding and accelerating CCA).

Administrative - Alternative arguments
The draft legislation provides that the CRA may advance alternative arguments in support of assessments at any time when the assessment is under objection or appeal. The alternative argument may result in an increase or adjustment to the assessed amount for a particular source of income, provided that the total amount determined to be payable or remittable on assessment does not increase. Finance has introduced this draft legislation for both the Income Tax Act and the Excise Tax Act. This tax measure was first included in the 2015 federal budget.

For more information, contact your KPMG adviser.

Information is current to August 02, 2016. 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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