Canada: Federal budget bill 2016, first reading

Canada: Federal budget bill 2016, first reading

Bill C-15—that includes some of the proposals introduced by the 2016 federal budget and several outstanding 2015 federal budget measures, such as changes affecting the taxation of inter-corporate dividends under section 55, the withholding tax requirements for non-resident employers (in the form of an amendment to section 153), and the dividend rental arrangement rules under section 112—received first reading on 20 April 2016.

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Corporate tax measures

The proposed legislation in Bill C-15 includes corporate tax measures that would:

  • Amend the anti-avoidance rules in section 55 of Canada’s income tax law, that prevent the conversion of capital gains into tax-deductible inter-corporate dividends and make consequential stock dividend changes in section 52
  • Keep the small business tax rate at 10.5% for the 2016 and subsequent tax years under section 125
  • Modify the dividend rental arrangement rules to deny the inter-corporate dividend deduction under synthetic equity arrangements, under sections 112 and 248
  • Expand the definition of Canadian exploration expense, to include the costs of environmental studies or community consultations to obtain certain permits, under section 66.1
  • Tighten the anti-avoidance rules for captive insurance companies by amending the foreign accrual property income (FAPI) rules in section 95

Other tax measures

The proposed legislation in Bill C-15 also includes other tax measures that would:

  • Adjust the gross-up and dividend tax credit for non-eligible dividends consequential to holding the small business tax rate for the 2016 and subsequent tax years at 10.5%
  • Introduce changes consequential to the introduction of the new 33% individual tax rate, such as: (1) provide a 33% charitable donation tax credit for donations over $200 to trusts that are subject to the top tax rate on all of their taxable income; (2) provide a new 33% tax credit rate for gifts to registered charities in excess of $200 to the extent the individual (including graduated rate estates and qualified disability trusts) has taxable income above the $200,000 threshold; (3) increase to 33% (from 28%) the tax rate on personal services business income earned by corporations; and (4) amend the capital gains refund mechanism for mutual fund trusts to reflect the 33% top rate in the formulas that are used to compute refundable tax 
  • Provide an exemption to the withholding tax requirement on payments made by "qualifying non-resident employers" to "qualifying non-resident employees" under Regulation 102 (in the form of amendments to section 153)• Extend the mineral exploration tax credit for flow-through share investors by one year
  • Reinstate the labour-sponsored venture capital corporations tax credit for purchases of shares of provincially registered labour-sponsored venture capital corporations for the 2016 and subsequent tax years
  • Permit investments in limited partnerships by registered charities and registered Canadian amateur athletic associations 
  • Eliminate individual (personal) tax credits including the textbook, education, family tax cut and child fitness tax credits and introduce new individual (personal) tax credits including the school supplies tax credit
  • Limit the circumstances in which the repeated failure to report income penalty will apply 
  • Permit the sharing of taxpayer information within the Canada Revenue Agency (CRA) to facilitate the collection of certain non-tax debts

Excise tax measures

The proposed legislation in Bill C-15 also includes excise tax amendments that would:

  • Clarify that the goods and services tax / harmonized sales tax (GST/HST) generally applies to supplies of purely cosmetic procedures provided by all suppliers, including registered charities
  • Provide that when a charity makes a taxable supply of property or services in exchange for a donation, and when an income tax receipt may be issued for a portion of the donation, only the value of the property or services supplied will be subject to GST/HST
  • Provide that interest earned in respect of certain deposits is not included in determining whether a person is considered to be a financial institution for GST/HST purposes
  • Clarify the treatment of imported reinsurance services under the GST/HST imported supply rules for financial institutions 
  • Add insulin pens, insulin pen needles and intermittent urinary catheters to the list of GST/HST zero-rated medical and assistive devices 
  • Provide that excise tax relief for diesel fuel used as heating oil or to generate electricity is targeted to specific instances.

Non-tax measures

Proposed legislation in Bill C-15 for non-tax measures include measures that would: 

  • Implement the new Canada child benefit to replace the Canada child tax benefit and universal child care benefit
  • Make changes to Canada's employment insurance program, including reducing the waiting period for benefits to one week (from two) 
  • Restore the age of eligibility for old age security and the guaranteed income supplement to 65 years from 67 years

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