Business Measures in 2019 Federal Budget

by Bennett Jones LLP
Contact

Bennett Jones LLP

The 2019 Canadian federal budget was released on March 19, 2019 (Budget Day). As many of the proposals are aimed at investing in Canada’s middle class, the Budget was relatively light on proposals affecting businesses. Nevertheless, there are a number of measures of relevance to the business community that are summarized below.

Employee Stock Options

Currently, employee stock options may receive beneficial tax treatment that is similar to the taxation of capital gains. Budget 2019 proposes to cap the amount that employees of "large, long-established, mature firms" can claim for the stock option deduction at $200,000 per year (based on the fair market value of the underlying shares at the date of the grant of the stock options). Stock option grants in excess of the annual cap will not receive the benefit of the stock option deduction and will be subject to ordinary marginal tax rates. Employees of start-ups and other emerging Canadian businesses will not be subject to the proposed annual cap.

Further details and proposed legislation are expected to be released in the summer of 2019. Stock options granted prior to the announcement of the proposed legislation will not be subject to the proposed amendment.

Scientific Research and Experimental Development Tax Credits

Budget 2019 proposes amendments to the "scientific research and experimental development" (SRED) program which is generally aimed at encouraging business innovation by providing tax incentives to companies that conduct SRED in Canada. Qualifying expenditures are fully deductible in the year they are incurred and are also eligible for an investment tax credit. While the general tax credit is 15 percent, Canadian controlled private corporations (CCPCs) receive an enhanced 35 percent credit for expenditures up to $3 million. Under current rules, the expenditure limit is gradually phased out where taxable income for the previous year exceeds $500,000 and when taxable capital employed in Canada exceeds $10 million. Budget 2019 proposes to repeal the use of taxable income as a factor in determining the CCPCs annual expenditure limit in order to provide a more predictable phase-out of the enhanced credit.

Accelerated Investment Incentive

Budget 2019 confirms the temporary changes to the capital cost allowance (CCA) rules that the government proposed in the 2018 fall economic statement: immediate expensing for manufacturing and processing investments, immediate expensing for clean energy investments, and the accelerated investment incentive. The accelerated investment incentive provides for an enhanced deduction in the first year of up to three times the normal first-year deduction depending on the type of property and when that property is available for use. These changes aim to encourage investment in Canada and apply to capital property acquired after November 20, 2018, and available for use before 2028.

See our recent blog post on 2018 federal Fall Economic Statement for a full explanation of these changes.

Transfer Pricing

The transfer pricing rules generally operate to ensure that transactions between Canadian taxpayers and non-arm’s length non-residents occur on arm’s length terms. Budget 2019 proposes two measures in respect of transfer pricing.

The first measure is to clarify that the transfer pricing rules take priority over all other provisions in the Income Tax Act (the Act). Currently, both the transfer pricing rules and other provisions of the Act could potentially apply to the same transaction. This has caused some confusion in the tax community as to which rule takes priority in these circumstances. The proposal in Budget 2019 will eliminate this confusion. This proposal will apply to taxation years that begin on or after Budget Day.

The Canadian Revenue Agency (CRA) is generally able to reassess a taxpayer within three years after the end of the taxpayer’s normal reassessment period in respect of transactions involving the taxpayer and a non-arm’s length non-resident person. Budget 2019 proposes to amend this rule to adopt the definition of “transaction” in the transfer pricing rules (which is broader than the ordinary meaning of the term and includes an arrangement or event) so that the extended reassessment period will apply to transfer pricing adjustments. This proposal will apply to taxation years for which the normal reassessment period ends on or after Budget Day.

Foreign Affiliate Dumping

The foreign affiliate dumping rules (FAD rules) generally target so-called “sandwich structures” where a foreign parent corporation controls a corporation resident in Canada (CRIC) which in turn has one or more foreign affiliates. Where this structure exists, investments made by a CRIC in a foreign affiliate can, among other things, result in a dividend deemed to have been paid by the CRIC to the foreign parent which results in Canadian withholding tax. Budget 2019 has expanded the application of the FAD rules so that they apply not only when the CRIC is controlled by a non-resident corporation, but also where it is controlled by a non-resident individual, a non-resident trust, or a group of persons that do not deal with each other at arm’s length, comprising any combination of non-resident corporations, non-resident individuals and non-resident trusts.

Tax Treaty Amendment via Multilateral Instrument

Budget 2019 reaffirms the Government's commitment to continued participation in the OECD base erosion and profit shifting (BEPS) project. It notes that the Government is taking the necessary steps to enact and ratify the recently executed Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) though no indication is provided with respect to timing of the same. The Government is also participating in an OECD review of the standard for individual country reports to ensure that each report provides tax administrations with information that allows for the proper assessment of transfer pricing and other BEPS risks.

BEPS refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. In November 2016, over 100 jurisdictions concluded negotiations on the MLI that will swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. Specifically, the MLI would operate to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS initiative into bilateral tax treaties worldwide. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.

The introduction, first and second reading of the MLI (Bill C-82) occurred in 2018. The MLI was adopted by the Standing Committee of Finance on February 28, 2019, and presented to the House of Commons on March 1, 2019. The third reading of the MLI at the House of Commons, in addition to the Senate approval process, still remain.

Derivative Forward Agreements—Character Conversion Transactions

Gains realized by taxpayers on the purchase of capital property are taxed as ordinary income when the capital property is acquired under a "derivative forward agreement" (DFA), which is generally defined as an agreement to purchase/sell a capital property if the agreement exceeds 180 days and the difference between the fair market value of the property delivered on the settlement date and the amount paid for the property is derivative in nature. This definition contains a carve out for gains attributable to what the federal government considers ordinary commercial transactions.

Budget 2019 would deny the ordinary commercial transaction carve out where one of the main purposes of a series of transactions or events is to convert interest, dividends, or other income of a trust (excluding capital gains) attributable to a Canadian security of an issuer, into a capital gain. This proposed amendment is set to apply to transactions entered into on or after Budget Day, with grandfathering rules proposed for agreements entered into before Budget Day.

Cross-Border Securities Lending Arrangements

A non-resident that owns shares of a Canadian corporation can enter into a "securities lending arrangement" (SLA) whereby it lends the shares to a Canadian resident and receives dividend compensation payments in respect of dividends paid on the lent shares. The non-resident therefore retains the same economic risks and returns in respect of the lent share, but receives dividend compensation payments from the Canadian resident borrower in lieu of receiving dividends directly. The SLA rules are generally designed to put the non-resident in the same tax position as if the security had not been lent. If the arrangement is "fully collateralized", any dividend as a deemed dividend and subject to Canadian withholding tax. If the arrangement is not "fully collateralized", the payment is treated as interest which generally is not subject to Canadian withholding tax.

Budget 2019 identified concern that non-residents were avoiding the SLA rules by structuring arrangements that either were not "fully collateralized" or did not meet the technical definition of an SLA. It proposes to broaden the scope of the SLA rules to ensure that non-residents cannot avoid withholding tax on dividends from Canadian corporations in these circumstances. The proposed amendments will apply to dividend compensation payments made after Budget Day unless the loan was in place before Budget Day, in which case the amendments will apply to compensation payments made after September 2019.

In addition, the Budget proposes to broaden an existing Canadian dividend withholding tax exemption for SLAs involving shares of foreign corporations. This proposed amendment will apply to compensation payments made on or after Budget Day.

Mutual Fund Trust Allocation to Redeemers Methodology

To prevent double taxation, many mutual fund trusts (MFTs) use what has become known as the "redeemer methodology" to allocate capital gains realized on the disposition of fund assets to unitholders on the redemption of units of such MFT. The MFT then claims a corresponding deduction for the allocated capital gains. Budget 2019 indicates that where the capital gains on the disposition of fund assets exceed the unitholders' gains on redemption, the excess can result in an inappropriate tax deferral. In response, Budget 2019 proposes to introduce a new rule to prevent MFTs from claiming a deduction for the portion of a capital gain allocated in excess of the capital gain realized by a redeeming unitholder if the allocation reduces the unitholder's redemption proceeds.

Similarly, Budget 2019 proposes to introduce a new rule to prevent MFTs from claiming a deduction in respect of ordinary income allocated to a redeeming unitholder if the allocation reduces the unitholder's redemption proceeds. This proposal is aimed at preventing MFTs from using the redeemer methodology to convert ordinary income into capital gains.

These proposed amendments are scheduled to apply for taxation years that begin on or after Budget Day.

Increases in Resources for Audits

In recent years, the Canadian Government has invested significant additional resources in the CRA to expand and improve its audit and enforcement functions. Budget 2019 continued this trend by committing an additional $150.8 million over the next five years to combat tax evasion and aggressive tax avoidance. The CRA will use the funds to hire additional auditors, create a new data quality examination team to ensure proper compliance by non-residents of Canada, and extend programs aimed at combatting offshore non-compliance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bennett Jones LLP | Attorney Advertising

Written by:

Bennett Jones LLP
Contact
more
less

Bennett Jones LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.