PMAC COMPLIANCE OFFICERS’ NETWORK March 21, 2013 Federal Budget Highlights Nigel Johnston njohnston@mccarthy.ca Wendy Brousseau wbrousseau@mccarthy.ca #12389846 McCarthy Tétrault LLP / mccarthy.ca
Outline ¬ Character conversion transactions ¬ Synthetic dispositions ¬ Trust loss trading ¬ Dividend tax credit ¬ Other income tax measures ¬ GST/HST pension plan measures McCarthy Tétrault LLP / mccarthy.ca
Character Conversion Transactions ¬ Directed at conventional/prepaid forward transactions that “convert” an income return into a gain realized on sale of capital property (generally “Canadian securities” in respect of which a 39(4) election is made) McCarthy Tétrault LLP / mccarthy.ca
Character Conversion Transactions Prepaid Forward Conventional Forward Short Prepayment Canadian Securities Counterparty Counterparty Fund Fund Forward Forward Purchase Sale Agreement Agreement Canadian Securities Reference Fund Reference Fund McCarthy Tétrault LLP / mccarthy.ca
Character Conversion Transactions ¬ “derivative forward agreement” ¬ Agreement to purchase/sell capital property ¬ Term of agreement/series of agreements greater than 180 days ¬ Sale price of property to be sold by taxpayer (in case of sale)/ property to be delivered to taxpayer (in case of purchase) determined in whole/part by reference to an underlying interest (including value, price…or “thing”) other than value of the property or income /capital gains from the property McCarthy Tétrault LLP / mccarthy.ca
Character Conversion Transactions ¬ If property is sold under DFA, include in income the sale price less ACB ¬ If property is acquired under a DFA, include in income FMV less cost ¬ Proposals apply to (1) agreements entered into on or after Budget Day (March 21, 2013), and (2) to pre-Budget Day agreements if term is extended on or after Budget Day, “as if the agreement were entered into at the time of the extension”. McCarthy Tétrault LLP / mccarthy.ca
Character Conversion Transactions ¬ Finance’s view is that “upsizing” is a new agreement ¬ Issues re 30-day rolling forwards: ¬ Appears that agreements that were completed before, or straddle, Budget Day are not included in computing whether a series exceeds 180 days ¬ No new money—but should be able to “upsize” to take into account investment return on expiring forward McCarthy Tétrault LLP / mccarthy.ca
Synthetic Dispositions ¬ Stated purpose seems to be to treat a property to be disposed of for FMV when taxpayer no longer has any “material” economic exposure to the property in order that taxpayer can’t defer recognition of gain McCarthy Tétrault LLP / mccarthy.ca
Synthetic Dispositions ¬ Stock Monetization Short Loan BCE Taxpayer Counterparty Forward Sale Agreement (Closing date – 5 years- price =$40) BCE shares acb = $10 FMV = $40 McCarthy Tétrault LLP / mccarthy.ca
Synthetic Dispositions ¬ “synthetic disposition agreement”: ¬ One or more agreements or other arrangements (other than a lease of tangible property) ¬ Entered into by taxpayer (or NAL person or partnership) McCarthy Tétrault LLP / mccarthy.ca
Synthetic Dispositions ¬ Have effect (or would have effect if taxpayer entered into instead of NAL person or partnership) of “eliminating all or substantially all of the taxpayer’s risk of loss and opportunity for gain or profit in respect of the property for a period of more than one year”[should not apply to “ordinary” hedges that eliminate risk of loss only] ¬ If entered into by NAL person or partnership, may reasonably be intended for that purpose ¬ Do not otherwise result in a disposition of the property McCarthy Tétrault LLP / mccarthy.ca
Synthetic Dispositions ¬ New 80.6(1) will deem a property to be disposed of at FMV and reacquired at cost equal to FMV on entering into an SDA in respect of the property McCarthy Tétrault LLP / mccarthy.ca
Synthetic Dispositions ¬ Taking an Initial Hedged Position Parent long BCE acb = FMV = $40 Sub short BCE McCarthy Tétrault LLP / mccarthy.ca
Synthetic Dispositions ¬ In the prior slide, no consequence under 80.6(1) as no accrued gain on BCE ¬ But, for purposes of dividend stop loss rules and FTC, taxpayer is deemed not to own a property if (1) the taxpayer would be deemed to dispose of the property under 80.6(1) if the definition of SDA referred to 30 days instead of one year, and (2) taxpayer didn’t own the property throughout the preceding 365-day period/acquired it less than one-year before the particular time McCarthy Tétrault LLP / mccarthy.ca
Trust Loss Trading ¬ ITA contains rules that eliminate capital loss carryforwards, “stream” non-capital losses, require certain accrued losses to be realized etc. if control of a corporation is “acquired” by a person or group of persons ¬ No similar rules apply to trusts ¬ A trust will be subject to a “trust loss restriction event” if a person becomes a “majority interest beneficiary” of the trust or a “group” of persons becomes a majority-interest” group of beneficiaries of the trust McCarthy Tétrault LLP / mccarthy.ca
Trust Loss Trading ¬ If a trust is subject to a loss restriction event, restrictions to its tax attributes will apply that are similar to those on the acquisition of control of a corporation ¬ Apply to transactions that occur after Budget Day with grandfathering for pre-Budget Day written agreements McCarthy Tétrault LLP / mccarthy.ca
Dividend Tax Credit ¬ Gross-up and dividend tax credit on non-eligible dividends reduced raising effective federal rate to 21.22% (from 19.58%) ¬ Applies to dividends paid after 2013 McCarthy Tétrault LLP / mccarthy.ca
Other Income Tax Measures ¬ Increase in lifetime capital gains exemption from $750,000 to $800,000 for QSBC shares effective 2014 ¬ Extended reassessment period where T1135 (foreign income verification statement—over $100,000 of “specified foreign property”) is not filed as and when required or it fails to report information required or if income from a “specified foreign property” is not reported on tax return— can assess 3 years after end of normal assessment period McCarthy Tétrault LLP / mccarthy.ca
Other Income Tax Measures ¬ Extended reassessment period where a deduction or claim is made in respect of a tax shelter or “reportable transaction” and the required information form was not filed when due—can assess/reassess within 3 years of date the information return is filed ¬ Stop International Tax Evasion Program— whistleblower program ¬ Payment of 50% of tax in issue required in relation to disputes concerning charitable donations made as part of a tax shelter McCarthy Tétrault LLP / mccarthy.ca
Other Income Tax Measures ¬ Termination of LSVCC ¬ Extension of rules to address corporate loss trading McCarthy Tétrault LLP / mccarthy.ca
Proposed Changes to the GST/HST Rules for Pension Plans ¬ Current rules complex and impose a significant compliance burden ¬ Two measures intended to simplify employer compliance 1. Election not to account for GST/HST on actual taxable supplies 2. Relief from accounting for GST/HST on deemed taxable supplies McCarthy Tétrault LLP / mccarthy.ca
Election not to account for GST/HST on taxable supplies ¬ Current Rules • Employer required to account for GST/HST on “actual” taxable supplies and, on an annual basis, also on “deemed” taxable supplies • Potential for double tax • Tax adjustment note (TAN) mechanism to eliminate double tax • TAN rules complex and burdensome McCarthy Tétrault LLP / mccarthy.ca
Election not to account for GST/HST on taxable supplies ¬ Proposed Election • Participating employer and a pension entity may jointly elect to treat actual taxable supplies as being made for no consideration – if employer accounts for and remits tax on the deemed taxable supplies • Eliminates the need for TANs • Election not available for master trusts • This measure will apply to supplies made after March 21, 2013 McCarthy Tétrault LLP / mccarthy.ca
Relief from accounting on deemed taxable supplies ¬ Full relief • When the 5% GST (and federal component of the HST) the employer was required to account for, in the preceding fiscal year, is less than both: • $5,000 and • 10% of the total net GST paid by all pension entities of the pension plan in that preceding year • An employer will not be entitled to benefit from full relief if a joint election is in place not to account for the GST/HST on actual taxable supplies McCarthy Tétrault LLP / mccarthy.ca
Relief from accounting on deemed taxable supplies ¬ Partial relief • Where thresholds not met or joint election, partial relief in respect of employer’s “internal pension activities” – i.e., inputs acquired for consumption or use in the activities of the employer that relate to the pension plan – other than making supplies to the pension entity • Employers will be relieved from applying the deemed taxable supply rules if the amount of GST (and federal component of the HST) that the employer was required to account for under the deemed taxable supply rules in respect of internal pension activities, in the preceding fiscal year, was below both the $5,000 and 10% threshold McCarthy Tétrault LLP / mccarthy.ca
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