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Tax Measures: Supplementary Information and Notices of Ways and Means Motions

Table of Contents

Tax Measures: Supplementary Information

Overview

Personal Income Tax Measures

Business Income Tax Measures

Sales and Excise Tax Measures

Other Measures

Previously Announced Measures

Notices of Ways and Means Motions

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Overview

This annex provides detailed information on each of the tax measures proposed in the budget.

Table A5.1 lists these measures and provides estimates of their budgetary impact.

The annex also provides Notices of Ways and Means Motions to amend the Income Tax Act, the Excise Tax Act relating to the Goods and Services Tax and Harmonized Sales Tax (GST/HST), the Customs Tariff relating to the Travellers' Exemption, the Excise Tax Act relating to Excise Taxes and the Federal-Provincial Fiscal Arrangements Act.

Table A5.1
Cost of Proposed Tax Measures (millions of dollars)

	2006-07	2007-08	2008-09	Total
Personal Income Tax Measures
Working Income Tax Benefit	140	550	555	1,245
Registered Disability Savings Plan1,2	-	25	115	140
Private Foundations	-	75	75	150
Registered Education Savings Plans1	5	15	20	40
Elementary and Secondary School Scholarships	-	-	-	-
New Child Tax Credit	355	1,445	1,475	3,275
Spousal and Other Amounts	70	270	280	620
Public Transit Tax Credit	-	10	20	30
Lifetime Capital Gains Exemption	5	85	90	180
Meal Expenses of Truck Drivers	-	15	25	40
Phased Retirement	-	-	-	-
Age Limit for Maturing RPPs and RRSPs	10	130	135	275
RRSP Qualified Investments	-	-	-	-
Northern Residents Deduction	-	-	-	-
The 2010 Games in Vancouver	-	-	-	-
Mineral Exploration Tax Credit	-	105	-30	75
Business Income Tax Measures
Aligning Capital Cost Allowance Rates With Useful Life	-	60	145	205
Accelerated Capital Cost Allowance for Oil Sands	-	-	-
Accelerated Capital Cost Allowance for Clean Energy Generation	-	10	10	20
Temporary Incentive for Manufacturing and Processing Machinery and Equipment	-	170	565	735
Donation of Medicines for the Developing World	-	-	-	-
International Taxation	-	60	140	200
Prescribed Stock Exchanges	-	-	-	-
Investment Tax Credit for Child Care Spaces	-	-	-	-
Remittance and Filing Thresholds	-	-	-	-
Sales and Excise Tax Measures
Foreign Convention and Tour Incentive Program	-	15	15	30
48-Hour Travellers' Exemption	-	5	5	10
Exports of Intangible Personal Property	-	-	-	-
GST/HST Remission-Certain School Authorities	-	20	-	20
Removal of Excise Tax Exemption for Renewable Fuels3	-	-	-40	-40
Green Levy on Fuel-Inefficient Vehicles4	-	-110	-105	-215
Excise Tax on Diesel Fuel- End-User Refunds	-	-	-	-
1 Note: In the early years, the cost of this measure is attributable to the program expenditure aspects of the initiative. 2 A "-" indicates a nil amount or a small amount less than $5 million. 3 Based on 2006 use of renewable fuels in Canada. 4 Net of removing the excise tax on heavy vehicles.

Personal Income Tax Measures

Working Income Tax Benefit

For many low-income Canadians, taking a job can mean being financially worse off. For example, a typical single parent who takes a low-income job can lose a large portion of each dollar earned to taxes and reduced income support. In addition, individuals who receive social assistance benefits could also lose in-kind benefits such as subsidized housing and prescription drugs. The impact of this on work incentives is often referred to as the "welfare wall". To improve incentives to work for low-income Canadians, and to lower the welfare wall, Budget 2007 proposes to introduce the Working Income Tax Benefit (WITB).

The WITB will provide a refundable tax credit equal to 20 per cent of each dollar of earned income in excess of $3,000 to a maximum credit of $500 for single individuals without dependants (single individuals) and $1,000 for families (couples and single parents). For the purpose of computing the WITB, earned income for a taxation year means the total amount of an individual's or family's income for the year from employment and business, and is determined without reference to any losses arising or claimed in that year.

To target assistance to those with low income, the credit will be reduced by 15 per cent of net family income in excess of $9,500 for single individuals and $14,500 for families. Net family income will be calculated on the same basis as is currently used for the purpose of the Canada Child Tax Benefit and the goods and services tax credit-generally total income minus the Universal Child Care Benefit and any allowable deductions such as pension contributions and child care expenses.

A single individual will be eligible for the WITB for a taxation year if the individual is resident in Canada throughout the taxation year and is, at the end of the taxation year, at least 19 years of age. A single parent will be eligible for the family-based WITB for a taxation year if the parent is resident in Canada throughout the taxation year and is, at the end of the taxation year, the primary caregiver to a dependent child in Canada. Similarly, a couple will be eligible for the family-based WITB for a taxation year if both individuals are resident in Canada throughout the taxation year. In circumstances where one member of a couple meets the residency requirement and one does not, the individual that meets the residency requirement will be deemed to be a single individual (in the case where there are no dependent children) or to be a single parent (in the case where the individual is, at the end of the taxation year, the primary caregiver to a dependent child in Canada).

Students (as defined for the purpose of the education tax credit), with no dependent children, who are enrolled as full-time students for more than three months in the taxation year will not be eligible for the WITB.

WITB Supplement for Persons With Disabilities

Persons with disabilities face significant barriers to their participation in the labour force. For example, they may have to incur expenses for disability supports in order to pursue employment. The WITB will therefore include an additional disability supplement for each individual, other than a dependant, who is eligible for the disability tax credit (DTC), who has at least $1,750 in individual earned income and who meets other eligibility requirements for the WITB. Each dollar of the individual's earned income in excess of $1,750 will be supplemented at a rate of 20 per cent up to a maximum credit of $250. The disability supplement will be reduced by 15 per cent of net family income in excess of $12,833 for single individuals and $21,167 for families.

The WITB and the disability supplement will be effective for the 2007 taxation year. WITB maximum benefit levels and thresholds will be indexed.

Prepayment

To maximize the effectiveness of the WITB, Budget 2007 proposes that a prepayment mechanism will be put in place beginning in 2008. Individuals and families who are eligible for the goods and services tax credit (GSTC), and who will be eligible for a WITB (based on anticipated yearly earned income), will be eligible to apply to the Canada Revenue Agency (CRA) for a prepayment of one-half of their estimated WITB. Prepayment will only be made in circumstances where the applicant provides adequate evidence of anticipated earned income and proof of residency in Canada.

A recipient of a prepayment must file an income tax return for the taxation year in which a prepayment is received. The provisions of the Income Tax Act which govern the application of interest to underpayments of income tax will apply to prepayments of the WITB that become repayable to the government. Further, if a prepayment has been made for a taxation year, no prepayment will be made for a subsequent taxation year until the income tax return for the earlier year is filed.

Prepayments will be made as part of the GSTC payment cycle. These amounts will be paid in equal instalments on each of the dates of the GSTC payment schedule that follows the date on which the amount of the WITB prepayment was determined. For example, a prepayment approved on application in May of 2008 would be paid in 3 equal instalments, that is on each of July 5th and October 5th of 2008, and January 5th of 2009, with a final reconciliation on assessment of the income tax return filed for 2008.

As with the GSTC, applicants will be required to advise the CRA of any changes in their situation that could affect anticipated yearly WITB entitlements (e.g. change in marital status). Application for the prepayment of a WITB for a taxation year must be made annually in prescribed form and be submitted to the CRA no later than September 1st of that year.

Working With Provinces

Canada's New Government is prepared to consider province or territory-specific changes to the design of the WITB to better harmonize it with existing provincial and territorial programs, if the design changes are consistent with the following principles:

• they build on actions taken by the province or territory to improve work incentives for low-income individuals and families;


• they are cost-neutral to the federal government;


• they provide for a minimum benefit level for all WITB recipients; and


• they preserve harmonization of the WITB with existing federal programs.

Agreements with provinces and territories will need to be in place by the fall of 2007, to allow for the implementation of the new structures for 2007 tax filing, in the spring of 2008.

Registered Disability Savings Plan

To help parents and others save for the long-term financial security of a child with a severe disability, Budget 2007 proposes to introduce a new Registered Disability Savings Plan (RDSP) with a Canada Disability Savings Grant (CDSG) program and Canada Disability Savings Bond (CDSB) program. The RDSP will be based generally on the existing Registered Education Savings Plan (RESP) design, as recommended by the Expert Panel on Financial Security for Children with Severe Disabilities.

The main design elements of the RDSP are described below. Further technical details will be provided when legislation is brought forward. Certain design details and administrative mechanisms will be developed in consultation with financial institutions. The Government will work with financial institutions to put the necessary administrative mechanisms (for example, for paying CDSGs and CDSBs to RDSPs) in place to allow financial institutions to begin offering RDSPs to Canadians as soon as possible in 2008. Individuals establishing an RDSP in 2008 will be eligible for a full year's CDSG and CDSB entitlement.

Eligibility

Generally, any person eligible for the disability tax credit (DTC) and resident in Canada, or their parent or other legal representative, will be eligible to establish an RDSP. The DTC-eligible individual will be the plan beneficiary. The Social Insurance Number of the beneficiary, and of the parent or other legal representative, will be required in order to establish the plan. These requirements must be met when the plan is established and whenever a contribution is made to the plan or a CDSG or CDSB is paid to the plan.

Tax Treatment

Contributions to an RDSP will not be deductible. The investment income on contributions, CDSGs and CDSBs will accrue tax-free. Contributions will not be included in income for tax purposes when paid out of an RDSP. CDSGs, CDSBs, and investment income earned in the plan will be included in the beneficiary's income for tax purposes when paid out of an RDSP.

Contributions

Contributions to an RDSP will be limited to a lifetime maximum of $200,000 in respect of the beneficiary, with no annual limit. There will be no restriction on who can contribute to the plan. Contributions will be permitted until the end of the year in which the beneficiary attains 59 years of age.

Canada Disability Savings Grants (CDSGs)

To provide additional direct government assistance to help ensure the future financial security of a child with a severe disability, RDSP contributions made in a year will qualify for CDSGs at matching rates of 100, 200 or 300 per cent, depending on family net income and the amount contributed. Table A5.2 sets out the specific matching rates that will apply to annual contributions, by family net income level.

Table A5.2
Canada Disability Savings Grant (CDSG)
Matching Rates on Contributions

Family Net Income ($)
Up to 74,357	Over 74,357
300% on first $500	100% on first $1,000
200% on next $1,000

The family net income threshold shown in Table A5.2 is in 2007 dollars. This threshold will be indexed to inflation for 2008, when RDSPs become operational, and for subsequent taxation years. Family net income will generally be determined in the same manner as for the Canada Education Savings Grant, except that, for years after the year in which the beneficiary attains 18 years of age, the relevant income will be that of the beneficiary and their spouse or common-law partner.

There will be a lifetime limit of $70,000 on CDSGs paid in respect of an RDSP beneficiary. An RDSP will be eligible to receive CDSGs until the end of the year in which the beneficiary attains 49 years of age.

Canada Disability Savings Bonds (CDSBs)

To ensure that RDSPs help promote the future financial security of children with a severe disability in lower-income families, CDSBs of up to $1,000 will be paid annually to the RDSPs of low and modest-income beneficiaries and families. CDSBs will not be contingent on contributions to an RDSP.

The maximum $1,000 CDSB will be paid to an RDSP where family net income does not exceed $20,883. The CDSB will be phased out gradually for those with family net income between $20,883 and $37,178. These income thresholds are in 2007 dollars and will be indexed to inflation for 2008, when RDSPs become operational, and for subsequent taxation years. Family net income will be determined in the same manner as for the CDSG.

There will be a lifetime limit of $20,000 on CDSBs paid in respect of an RDSP beneficiary. An RDSP will be eligible to receive CDSBs until the end of the year in which the beneficiary attains 49 years of age.

Payments

Payments from an RDSP will be required to commence by the end of the year in which the beneficiary attains 60 years of age.

Payments from an RDSP will be subject to a maximum annual limit determined by reference to the life expectancy of the beneficiary and the fair market value of the property of the plan, consistent with the Expert Panel's proposals.

In addition, the beneficiary of an RDSP, or the beneficiary's legal representative, will be permitted to encroach on the capital and income of the plan, in such amounts and for such purposes as the plan may provide.

To ensure that RDSP contributions, CDSGs and CDSBs are used to support the beneficiary, only the beneficiary or the beneficiary's legal representative will be permitted to receive payments from the RDSP. Contributors will not be entitled to receive a refund of contributions.

Repayments of CDSGs and CDSBs

There will be a requirement for an RDSP to repay to the government all CDSGs and CDSBs (and associated investment income) paid to the plan in the ten years preceding a payment from the plan, upon the cessation of the beneficiary's eligibility for the DTC or the death of the beneficiary.

Death or Cessation of Disability

Where the beneficiary of an RDSP either ceases to be eligible for the DTC or dies, the funds in the RDSP (net of repayments as described above) will be required to be paid to the beneficiary or pass to the beneficiary's estate. That amount (net of contributions) will be included in the income of the Beneficiary for tax purposes.

Treatment of the RDSP for Means-Tested Benefits

Budget 2007 proposes that amounts paid out of an RDSP will not be taken into account for the purposes of calculating income-tested benefits delivered through the income tax system. In addition, RDSP payments will not reduce Old Age Security or Employment Insurance benefits.

Provinces and territories provide income support for persons with disabilities through means-tested programs. The Expert Panel noted that, for the RDSP program to be effective, RDSP assets should not disqualify a plan beneficiary from receiving provincial or territorial income support provided to persons with disabilities. The Expert Panel also noted that income payments from the plan should supplement-not reduce-income support provided under these programs at least until the level of income support plus RDSP payments exceeds the Low Income Cut Off (LICO) for the province or territory.

The Minister of Human Resources and Social Development, in collaboration with the Minister of Finance, will work with the provinces and territories to ensure that the RDSP is an effective savings vehicle to improve the financial security and well-being of children with severe disabilities.

Private Foundations

Donations of publicly-listed securities to public charities have been eligible for a reduced inclusion rate on capital gains since 1997 and a complete exemption since May 2, 2006.

In Budget 2006, the Government committed to consult with private foundations and other interested parties regarding the development of appropriate self-dealing rules. If appropriate rules could be devised, the Government would be prepared to bring them before Parliament and extend the capital gains exemption for gifts of listed securities to private foundations at the same time.

Eliminating Capital Gains Tax on Charitable Donations to Private Foundations

To encourage additional charitable donations to private foundations, Budget 2007 proposes to eliminate the taxation of capital gains arising from donations of publicly-listed securities to private foundations.

In addition, when an arm's length employee acquires a publicly-listed security under an option granted by the employer and donates the security to a public charity within 30 days, the employee may be eligible for a special deduction, the general effect of which is to exempt the associated employment benefit from tax. Budget 2007 proposes to extend this provision to qualifying donations to private foundations.

This zero inclusion rate for gains and income in respect of publicly-listed securities will apply to gifts made on or after March 19, 2007.

Excess Business Holdings Regime for Private Foundations

The zero inclusion rate for gains and income in respect of publicly-listed securities has not been available for gifts to private foundations primarily due to concerns that, by virtue of their and the foundation's combined shareholdings, persons connected with the foundation have influence that they may use for their own benefit.

To address such self-dealing opportunities, Budget 2007 proposes to introduce an excess business holdings regime for private foundations that will complement the intermediate sanctions introduced for charities in 2004. The proposed regime will place limits on foundation shareholdings that take into account the holdings of persons not dealing at arm's length with the foundation.

All private foundations will be subject to the excess business holdings regime in respect of both publicly-listed and unlisted shares.

Excess Business Holding Ranges

The excess business holdings regime identifies three ranges of shareholdings by a foundation, with different implications for the foundation for each range. Each share class of a corporation is considered separately.

Safe Harbour

A foundation will be in a "safe harbour" in respect of its holdings of a corporation if, for each class of shares which it holds of that corporation, its holdings total 2 per cent or less of all outstanding shares of that class. In this circumstance, no divestment by the foundation is required and the foundation would not need to monitor and report the holdings of any non-arm's length person.

Monitoring Phase

If, at any time in its taxation year, a foundation's holdings of one or more share classes of a corporation exceed 2 per cent of the outstanding shares of that class, the foundation will be required to determine and report to the Canada Revenue Agency (CRA) the shares held at the end of the year, in all share classes of that corporation, by the foundation and by non-arm's length persons. The foundation will also be required to report in its annual information return any material transactions during the year by the foundation or non-arm's length persons for any period during which the foundation was outside the safe harbour in respect of the corporation. A transaction (or series of transactions) will be considered material where it involves the acquisition or disposition of more than $100,000 worth of shares of a particular class or more than 0.5 per cent of all outstanding shares of that class.

Divestment Required

Where a foundation is outside the safe harbour and the foundation and all non-arm's length persons together hold more than 20 per cent of all outstanding shares in any share class of a corporation, a divestment will be required. The foundation will be subject to penalties unless the combined holdings of the foundation and its non-arm's length persons are reduced to 20 per cent or less of that share class within specified time periods (as discussed below), or until the holdings of the foundation do not exceed 2 per cent.

The reporting requirements in the monitoring phase will also apply in the divestment phase. Examples of actions required by a foundation in the safe harbour, monitoring phase or divestment phase, are illustrated in Table A5.3.

Table A5.3
Examples of Actions Required by a Foundation

	Private Foundation (Holdings of Share Class)	Non-Arm's Length Persons (Holdings of Share Class)	Action Required by a Foundation
1. Safe harbour	2% or less	Any percentage	None
2. Monitoring phase	5%	10%	Reporting required
	10%	10%
	20%	0%
3. Divestment required	25%	0%	Reduce holdings to 20%
	8%	14%	Reduce holdings to 6%1
	10%	17%	Reduce holdings to 3%1
	Above 2%	Above 18%	Reduce holdings to 2%1
1 Alternatively, non-arm's length persons could reduce their holdings until the combined holdings of the foundation and non-arm's length persons did not exceed 20%.

Anti-Avoidance Measures

In order to address structures or transactions that are clearly devised to frustrate the policy objectives of this regime, appropriate anti-avoidance measures will be introduced.

Public Disclosure

At present, private foundations report the total value of their investment assets to the CRA each year when they file an information return. However, foundations are not currently required to disclose which securities they hold.

Increased reporting is consistent with measures introduced in 2004 to enhance transparency and accessibility for the public by making more information available on charities (Table A5.4). Therefore, in the monitoring and divestment phases, information related to excess business holdings will be made publicly available, including: whether a foundation is outside a safe harbour in respect of any corporation; the name of any such corporation; and the total percentage shareholdings of the foundation, and of non-arm's length persons, in the corporation. The identities of non-arm's length shareholders will not be publicly disclosed.

Table A5.4
Examples of Information Reported to the Canada Revenue Agency and Available to the Public-Current and Proposed

Type of Information	Made Available To
Current (all charities)
Directors' positions, non-arm's length relationships	Public via Internet
Assets, liabilities, revenues etc. as reported to CRA	Public via Internet
Total value of investments in non-arm's length parties ($)	Public via Internet
Names of all qualified donees to which payments made	Public via Internet
Charity's own financial statements	Public on request
Address, date of birth, phone number of each director	CRA only
Proposed additional information (private foundations only)
Name of corporations (if any) in respect of which a foundation is beyond the safe harbour	Public via Internet
Total percentage holdings of the foundation for those corporations	Public via Internet
Aggregated holdings of all non-arm's length parties for those corporations1	Public via Internet
Names of non-arm's length persons with holdings1	CRA only
1 Amounts reported are subject to de minimis provisions described in the text.

Non-Arm's Length Persons

For the purposes of the excess business holdings rules, a foundation outside the safe harbour with respect to a corporation will be required to report in respect of the holdings in that corporation of persons not dealing at arm's length with the foundation. Such persons will include any person, or member of a related group of persons, that controls the foundation, and any person not dealing at arm's length with such a controlling person or group member.

Reporting will not be required in respect of non-arm's length persons who hold less than $100,000 worth of shares of a particular class and less than 0.5 per cent of all the outstanding shares of a class. A person will be considered not to be related to a controlling person (or to a member of a controlling group) if that person is at least 18 years of age and living separate and apart from the controlling person or member, and the Minister of National Revenue has agreed, on review of an application from a foundation, that the person is dealing at arm's length from the controlling person or member as a question of fact.

Compliance Periods

The length of the compliance period available to divest excess business holdings depends on how the excess arose. Where, at the end of a taxation year, a foundation has excess holdings, the excess must be divested by the end of

• that year, to the extent that there has been a purchase of shares by the foundation;


• the subsequent taxation year, where the excess is the result of an acquisition of shares by a non-arm's length person, or by a donation to the foundation by a non-arm's length person;


• the second subsequent taxation year, where the excess is the result of a donation from an arm's length party or a repurchase of shares by the corporation; and


• the fifth subsequent taxation year, where the excess is the result of a donation by way of a bequest.

The Canada Revenue Agency will have the discretion to specify conditions under which it might defer the year of the divestment obligation, upon application by the foundation, by up to five additional years. Such discretion might be exercised where divestment of the shares within the normal compliance period would significantly depress the share price, or where necessary to accommodate the requirements of securities regulators.

Transitional Provisions

Transitional rules will allow foundations to divest, over a period of 5 to 20 years, excess business holdings present on March 18, 2007. Excess holdings in respect of a foundation will be required to be reduced by 20 percentage points every 5 years, beginning from its first taxation year commencing on or after March 19, 2007, until they are eliminated.

Foundations may elect to be subject to the transitional rules when they file their annual information return for the first taxation year that begins on or after March 19, 2007. These foundations must determine and report, in that information return, their shareholdings (in combination with non-arm's length parties) in excess of the 20 per cent threshold on March 18, 2007. Once a foundation has reduced the combined holdings in a share class to 20 per cent or less, its transitional period will be considered completed for that share class. All donations or other acquisitions during the transitional period will be subject to the compliance periods for excess business holdings.

All monitoring and reporting requirements will apply equally to shares qualified for transitional relief as to shares received on or after March 19, 2007.

Limitation for Foundations in Transition

To encourage foundations with excess business holdings on March 18, 2007 to eliminate them in a timely manner, donations to a foundation that has not completed its transition by the end of its first taxation year beginning on or after March 19, 2012 will not qualify after that time for the zero inclusion rate for gains and income on donations of publicly-listed securities to private foundations proposed in this budget, until such time as the foundation completes its transitional period by eliminating its excess business holdings.

Gifts Made Conditional on a Foundation Retaining Securities

No obligation to divest will be imposed on donations of shares made before March 19, 2007, that were made subject to a trust or direction that they be retained by the foundation, if the terms of the gift prevent the foundation from disposing of them. The same provisions apply to donations made on or after March 19, 2007 and before March 19, 2012 pursuant to the terms of a will signed or an inter vivos trust settled before March 19, 2007 and not amended after that date.

However, these shares will be taken into account in determining the application of the excess business holdings regime to other shareholdings.

Penalties

A penalty will apply in respect of excess business holdings of a foundation that have not been divested as required. The initial penalty will equal 5 per cent of the value of excess holdings as at the end of the relevant period. If the foundation has been assessed an excess business holdings penalty in any of the previous five years, the penalty will equal 10 per cent. Repeated infractions may result in revocation of a foundation's charitable registration.

The Income Tax Act imposes a penalty on a person who fails to provide any information required on a prescribed form unless, in the case of information required about another person, a reasonable effort was made to obtain the information. Where a foundation is subject to an excess business holdings penalty in respect of a particular class of shares of a corporation, and the foundation has failed to provide information as required in respect of those shares, that excess business holdings penalty will be doubled.

Administrative and enforcement criteria applicable to existing penalties in respect of infractions by registered charities will apply as well to the excess business holdings penalties. In particular, where the penalty exceeds $1,000, the foundation will be permitted to satisfy its liability by transferring an amount equal to the penalty to eligible donees.

The excess business holdings regime will apply to all private foundations beginning with their first taxation year that begins on or after March 19, 2007.

Related Measures

The "non-qualifying securities" rules were introduced in 1997 to address certain issues in respect of the donation of securities, including the shares of a private corporation with which the donor does not deal at arm's length.

Under one of these rules, donors of non-qualified securities to private foundations are generally not permitted a charitable donations credit or deduction until the foundation disposes of the securities. This rule helps to establish a proper valuation of these securities. However, some donors have avoided these restrictions by transferring their private corporation shares into a trust in respect of which the charity is a beneficiary. A gift is recognized to the extent of the beneficial interest disposed of by the donor, yet the property may remain under the control of the donor through the donor's control of the trust. It is proposed that, if the donor is affiliated with the trust, the same restrictions will apply as if the donor had donated the shares in his or her own name.

Under another of these rules, which applies to both public charities and private foundations, the value of the gift for the purpose of the charitable donations tax credit is reduced if property is loaned back to (or made available for use by) the donor or a person dealing non-arm's length with the donor. This "loanback" rule applies only where the donor does not deal at arm's length with the charity. However, some charities will also accommodate arm's length donors who make their donations with the requirement that property be loaned back. The budget proposes to extend the loanback rule to cover these cases as well.

This measure applies to gifts made on or after March 19, 2007.

Registered Education Savings Plans

Budget 2007 proposes several measures to provide more flexibility to families who save through Registered Education Savings Plans (RESPs), and to make RESPs more responsive to the changing needs of education today.

 

Changing the Contribution and CESG Limits

To provide additional flexibility and further encourage additional savings for post-secondary education, Budget 2007 proposes the following changes:

• The $4,000 annual RESP contribution limit will be eliminated, and the lifetime RESP contribution limit will be increased to $50,000 from $42,000.


• The maximum annual RESP contribution qualifying for the 20-per-cent CESG will be increased to $2,500 from $2,000, thus increasing the maximum CESG per beneficiary for 2007 and subsequent years to $500 from $400. The maximum CESG for a year will increase to $1,000 from $800 if there is unused grant room because of contributions of less than the maximum CESG-eligible contributions for previous years. The $7,200 lifetime CESG limit will be unaffected by this change.

While these changes will apply to contributions made after 2006, the portion of any CESG entitlement that is attributable exclusively to the increased CESG limit will be paid to RESPs only after Royal Assent to the enabling legislation and once delivery systems are put in place.

Extending RESP Eligibility to More Part-Time Studies

Many students who pursue their post-secondary education on a part-time basis are not eligible to draw Education Assistance Payments (EAPs) from their RESPs, because the existing rules require that at least 10 hours per week be spent on courses or work. This requirement effectively limits eligibility for EAPs to full-time students and to part-time students with a heavy course load.

Budget 2007 proposes to relax the EAP eligibility requirement to accommodate qualifying part-time programs that do not meet the 10 hours per week requirement but require that at least 12 hours per month be spent on courses. Under this proposal, students 16 years of age or older will be able to receive up to $2,500 of EAPs for each 13-week semester of part-time study (or any greater amount approved by the Minister of Human Resources and Social Development on a case-by-case basis).

This change applies to the 2007 and subsequent taxation years.

Other RESP Changes

Quebec's recent budget proposed to introduce an education savings incentive program similar to the CESG program. Canada's New Government supports this initiative and is committed to making any federal legislative changes that may be necessary to ensure that the proposed program is treated in a manner consistent with the CESG program.

The CESG and CLB programs are administered by Human Resources and Social Development Canada (HRSDC), while the Canada Revenue Agency (CRA) administers the registration, auditing and compliance of RESPs. Both organizations have authority to share information necessary to ensure the integrity of the tax system and the CESG and CLB programs. Budget 2007 proposes to clarify HRSDC's authority to collect, on behalf of the CRA, any information that the CRA requires for purposes of administering the RESP tax provisions.

Elementary and Secondary School Scholarships

Scholarships to attend elementary and secondary schools are included in computing the income of the student to the extent that they exceed $500. Budget 2007 proposes to honour the Government's commitment to student academic excellence and choice by fully exempting scholarships and bursaries that are provided to attend elementary and secondary schools.

This measure will apply for the 2007 and subsequent taxation years.

New Child Tax Credit

Budget 2007 proposes to introduce a new non-refundable child tax credit for parents based on an amount of $2,000 (indexed) for each child under the age of 18 years at the end of a taxation year. The tax credit will be calculated by reference to the lowest personal income tax rate for the taxation year (i.e. 15.5 per cent in 2007). This new tax credit will take effect beginning in 2007, and will provide personal income tax relief of up to $310 per child.

Where the child resides together with the child's parents throughout the year, either of those parents may claim the credit. In other cases, the credit will be claimable in respect of a child by the parent who is eligible to claim the wholly dependent person credit for the year in respect of a child (or who would be so eligible if that child were the parent's only child).

For the year of the birth, adoption or death of a child, the full amount of the credit will also be claimable following the rules above.

Any unused portion of the credit will be transferable by a parent to the parent's spouse or common-law partner.

Spousal and Other Amounts

The income tax system currently includes personal credits to allow individuals to receive a basic amount of income on a tax-free basis. These include a credit for a basic personal amount of $8,929 for 2007, as well as a credit in respect of a spouse or common-law partner, or a wholly dependent relative, based on an amount of $7,581 for 2007. The amount upon which these credits is based is required to be reduced on a dollar-for-dollar basis by the dependant's net income in excess of a threshold ($759 for 2007).

Budget 2007 proposes to increase the amount upon which the spouse or common-law partner and wholly dependent relative credits are calculated by $1,348-thus matching the basic personal amount, with a corresponding elimination of the threshold above which the dependant's net income must be taken into account. These changes will take effect beginning in 2007 and will, in 2007, provide individuals with additional personal income tax relief of up to $209.

For the 2008 and subsequent taxation years, these personal credit amounts will be increased by the same amounts that are currently legislated for the basic personal amount. Specifically for 2008, these credit amounts will be increased by indexation plus an additional $200 and, for 2009, increased by indexation plus the greater of $600 and the amount required to raise these personal credit amounts to $10,000. The credit amounts will be indexed in the usual manner for subsequent taxation years.

Impact of Child Credit and Increases to the Spousal and Other Amounts on Typical Taxpayers: 2007

Table A5.5
Single Parent With One Child¹

Total Income	Net Federal Tax Pre-Budget 20072	Child Tax Credit3	Spousal and Other Amounts3	Total Tax Relief3	Change in Tax4
$	$	$	$	$	%
10,000	-611	0	0	0	-
20,000	-611	0	0	0	-
30,000	247	-310	-209	-519	-100
40,000	1,512	-310	-209	-519	-34
60,000	6,109	-310	-209	-519	-8
100,000	15,655	-310	-209	-519	-3
150,000	29,318	-310	-209	-519	-2
1 Child under age 7. 2 Does not include the Universal Choice in Childcare Benefit (UCCB) or the tax on the UCCB. Negative values indicate that the Goods and Services Tax (GST) credit, a refundable federal tax credit, is greater than federal personal income tax. 3 Negative values indicate a reduction in net federal personal income tax. Total tax relief can exceed net federal tax, which includes federal personal income tax as well as the GST credit. 4 A "-" indicates that percentage tax relief cannot be calculated because net federal personal income tax pre-Budget 2007 is less than or equal to zero.

 

Table A5.5 (cont'd)
One-Earner Family With Two Children¹

Total Income	Net Federal Tax Pre-Budget 20072	Child Tax Credit3	Spousal and Other Amounts3	Total Tax Relief3	Change in Tax4
$	$	$	$	$	%
10,000	-738	0	0	0	-
20,000	-534	-204	0	-204	-
30,000	911	-620	-209	-829	-91
40,000	2,962	-620	-209	-829	-28
60,000	7,649	-620	-209	-829	-11
100,000	17,475	-620	-209	-829	-5
150,000	31,348	-620	-209	-829	-3
1 One child under age 7, the other aged between 7 and 14. 2 Does not include the Universal Choice in Childcare Benefit (UCCB) or the tax on the UCCB. Negative values indicate that the Goods and Services Tax (GST) credit, a refundable federal tax credit, is greater than federal personal income tax. 3 Negative values indicate a reduction in net federal personal income tax. Total tax relief can exceed net federal tax, which includes federal personal income tax as well as the GST credit. 4 A "-" indicates that percentage tax relief cannot be calculated because net federal personal income tax pre-Budget 2007 is less than or equal to zero.

 

Two-Earner Family With Two Children¹

Total Income	Net Federal Tax Pre-Budget 20072	Child Tax Credit3	Spousal and Other Amount3	Total Tax Relief3	Change in Tax4
$	$	$	$	$	%
10,000	-738	0	0	0	-
20,000	-738	0	0	0	-
30,000	-290	-448	0	-448	-
40,000	794	-620	-91	-711	-90
60,000	3,943	-620	0	-620	-16
100,000	11,389	-620	0	-620	-5
150,000	22,455	-620	0	-620	-3
1 One child under age 7, the other aged between 7 and 14. Income assumed to be earned on a 60/40 basis. 2 Does not include the Universal Choice in Childcare Benefit (UCCB) or the tax on the UCCB. Negative values indicate that the Goods and Services Tax (GST) credit, a refundable federal tax credit, is greater than federal personal income tax. 3 Negative values indicate a reduction in net federal personal income tax. Total tax relief can exceed net federal tax, which includes federal personal income tax as well as the GST credit. 4 A "-" indicates that percentage tax relief cannot be calculated because net federal personal income tax pre-Budget 2007 is less than or equal to zero.

Public Transit Tax Credit

Budget 2006 proposed a non-refundable public transit tax credit for the cost of monthly public transit passes starting July 1, 2006. Budget 2007 proposes to strengthen this measure on two fronts.

Electronic Payment Cards

Since the introduction of this credit, several transit authorities have developed proposals for the introduction of cost-per-trip electronic payment cards. The requirements for the existing credit do not accommodate these proposed cards.

Budget 2007 proposes to extend the eligibility for the public transit tax credit to accommodate these electronic payment cards. Under this proposal, the cost of an electronic payment card will be eligible for the credit if:

• the cost relates to the use of public transit for at least 32 one-way trips during an uninterrupted period not exceeding 31 days, and


• that transit usage, and cost of those trips, are recorded and receipted to the purchaser by the relevant transit authority, in sufficient detail as to allow the Canada Revenue Agency to verify eligibility for the credit.

A one-way trip will consist of an uninterrupted trip between the place of origin of the trip and the destination.

This measure will apply to electronic payment cards issued after 2006.

Weekly Passes

There may be instances where low-income individuals are unable to afford the financial outlay associated with purchasing a monthly pass. Even though they are regular transit riders, they may purchase a series of weekly passes.

Budget 2007 proposes to extend eligibility for the public transit tax credit to accommodate weekly passes where an individual purchases at least four consecutive weekly passes. For the purposes of this measure, weekly passes will include passes that provide a passholder the right to unlimited public transit use within a period of between 5 and 7 days.

Individuals making claims will be required to retain their receipts or passes for verification purposes.

This measure will apply to weekly passes valid for use after 2006.

Lifetime Capital Gains Exemption

The income tax system currently provides a lifetime capital gains exemption (LCGE) on up to $500,000 of capital gains realized on the disposition of qualified farm and fishing property or qualified small business corporation shares.

Budget 2007 proposes to increase the LCGE such that it will apply to up to $750,000 of capital gains realized by an individual on qualified properties.

This measure will apply to dispositions of property that occur on or after March 19, 2007. In order to give effect to this measure for the 2007 taxation year, in which both the current and proposed capital gains exemption limits can apply, an individual's capital gains exemption will be determined as the sum of

• the individual's pre-budget capital gains exemption for the year calculated as if the individual's capital gains exemption limit remained at $500,000 of capital gains, and


• the amount (not exceeding $125,000) by which the increase in the individual's cumulative gains limit at the end of the year that is attributable to net taxable capital gains from dispositions of qualified property on or after March 19, 2007 exceeds the individual's pre-budget capital gains exemption.

An individual's cumulative gains limit at the end of a taxation year measures the extent to which an individual's net taxable capital gains from dispositions of qualified property has not been offset by certain losses and previously claimed capital gains exemptions.

Meal Expenses of Truck Drivers

In general, the Canadian tax system limits the deductibility of business-related meal and entertainment expenses to 50 per cent of the amount otherwise allowable as a deductible expense. This limitation reflects the personal consumption aspect inherent in such expenses.

Budget 2007 proposes to increase, over five years, to 80 per cent the deductible portion of the cost of food and beverages consumed by long-haul truck drivers during eligible periods of travel. This measure will also apply to employers that pay, or reimburse, such costs incurred by long-haul truck drivers that they employ.

For this purpose a long-haul truck driver will be:

• an employee whose principal duty of employment is to drive long-haul trucks for the purpose of transporting goods; and


• an individual whose principal business is to drive long-haul trucks for the purpose of transporting goods.

A long-haul truck will be a truck or tractor that is designed for hauling freight, that is primarily used for that purpose to earn income and that has a gross vehicle weight rating (as that term is defined in subsection 2(1) of the Motor Vehicle Safety Regulations) in excess of 11,788 kg.

An eligible period of travel during which the higher deductibility percentage will apply in respect of a long-haul truck driver is a period during which:

• the driver is away for at least 24 continuous hours from:

• the driver's trip is for the purpose of transporting goods to, or from, a location beyond a radius of at least 160 kilometres from the residential or business location, as the case may be.

The deductible portion of expenses will be increased to 60 per cent for expenses incurred on or after March 19, 2007 and before January 1, 2008, and to 65, 70 and 75 per cent for such expenditures incurred during 2008, 2009 and 2010, respectively. The deductible portion will be increased to 80 per cent for such expenditures incurred after 2010.

Currently, under the goods and services tax/harmonized sales tax (GST/HST), a person entitled to claim input tax credits (ITCs) for food and beverage expenses for a reporting period in a fiscal year is required to make a year-end adjustment to their net tax to recapture ITCs that are attributable to the personal consumption portion of the expenses. To parallel the change in deductibility of long-haul truck driver meal expenses under the Income Tax Act, the proportion of recaptured ITCs related to these expenses will decrease from 50 to 20 per cent between 2007 and 2011 for an allowance or reimbursement paid, or tax that became payable, or is paid without having become payable, in respect of the supply of the food and beverages for the periods during which the increased deductibility percentage is phased in for income tax purposes.

Phased Retirement

The Income Tax Regulations currently prohibit employees from accruing pension benefits under a defined benefit Registered Pension Plan (RPP) if they are receiving a pension from the plan or from another defined benefit RPP of the employer or a related employer. This rule prevents employers from offering phased retirement programs that would permit older workers to continue working, while at the same time receiving a partial pension and accruing further pension benefits in respect of their part-time work. It also prevents employers from paying a partial pension to older workers to increase the reward from full-time work, if the worker continues to accrue pension benefits.

To provide more flexibility to employers to offer phased retirement programs, and to increase the reward to older workers from full-time work, Budget 2007 proposes to amend the Income Tax Regulations to allow an employee to receive pension benefits from a defined benefit RPP and simultaneously accrue further benefits, subject to certain constraints.

Specifically, the new regulations will allow employers to offer qualifying employees up to 60 per cent of their accrued defined benefit pension, while accruing additional pension benefits on a current service basis in respect of their post-pension commencement employment. To ensure that this measure has a positive impact on labour supply, qualifying employees will be limited to employees who are at least 55 years of age and who are otherwise eligible to receive a pension without the plan imposing an early retirement reduction. The 60-per-cent limit will be based on the amount of pension benefits (including bridging benefits) that would be paid from the plan if the employee were fully retired.

There will be no requirement that the partial pension be based on a reduction in work time or that there be a corresponding reduction in salary. The tax rules will allow an employer to offer an employee a partial pension of up to 60 per cent of accrued pension benefits while at the same time allowing the employee to accrue benefits in respect of post-pension commencement employment, regardless of whether the employee is working full- or part-time. The provisions of the regulations which enable benefits to accrue in respect of periods of absence or reduced pay will not apply to employees accruing benefits under this new measure.

The new regulations will place no restrictions on when, or how often, an employee's accrued pension amount can be recalculated to take into account the employee's additional pensionable service and increased annualized earnings (if any) during a period of simultaneous accrual and pension payment. Nor will the tax rules prevent a plan from limiting participation to specific employees identified by the employer.

The new regulations will also ensure that the prohibition against the payment of bridging benefits on a stand-alone basis (i.e. without the simultaneous payment of lifetime pension amounts) does not apply with respect to qualifying employees. Bridging benefits are temporary pension amounts that can be paid up to the age of 65 years, the purpose of which is to bridge the gap from pension commencement until the time that public pension benefits (i.e. benefits under the Old Age Security program or under the Canada or Quebec Pension Plan) typically become payable.

This approach will give employers a great degree of flexibility in designing older-worker retention programs that meet their specific needs. It will, for example, permit employers to offer phased retirement programs that are based on a pro rata proportion of pension and salary-for example, 40 per cent of the accrued pension based on a reduction in work time of two days per week, and 60 per cent of salary based on working three days a week-or that provide for qualifying employees to receive the bridging benefits that would be payable if the employee were fully retired. It will also permit an employer to increase the reward from full-time work by offering a partial pension to those wishing to continue in employment on a full-time basis.

The prohibition on accruing additional benefits while in receipt of pension payments will continue to apply to designated plans as well as to persons who are connected with their employer. Designated plans (as defined in section 8515 of the Regulations) are generally one-person plans and small plans for groups of executives, owner-managers or other highly compensated employees. An employee is generally considered to be connected with an employer (as set out in subsection 8500(3) of the Regulations) if the employee does not deal at arm's length with the employer, or if the employee owns, in the case of a corporate employer, 10 per cent or more of the shares of the employer or a related corporation.

In order to provide for an appropriate period of consultation on the technical aspects of this measure, it is proposed that 2008 be the first year of service in respect of which an employee will be permitted to accrue benefits under a defined benefit RPP while in receipt of a partial pension.

The Government will proceed with any changes that are necessary to the federal Pension Benefits Standards Act, 1985 to accommodate phased retirement in federally regulated pension plans. Provincial pension benefits legislation may also need to be modified to accommodate this measure.

Age Limit for Maturing RPPs and RRSPs

The Income Tax Act and Regulations require that Registered Retirement Savings Plans (RRSPs), Registered Pension Plans (RPPs) and Deferred Profit Sharing Plans (DPSPs) mature by the end of the year in which the RRSP annuitant, or the RPP or DPSP member, turns 69 years of age. This means that no further contributions or benefit accruals are permitted to or under such plans, and that benefits under the plans must generally begin to be paid (which may involve a transfer of the funds to a Registered Retirement Income Fund (RRIF) or the purchase of a qualifying annuity).

Budget 2007 proposes to increase, for the 2007 and subsequent calendar years, the conversion age for these plans to 71 years of age from 69 years of age. This measure will benefit individuals who turn 69 years of age in 2007 or in a subsequent year.

The measure will also benefit individuals who turn 70 or 71 years of age in 2007. If contribution room is available, RRSP contributions will be permitted to be made in 2007 and 2008 for the former, and in 2007 for the latter. In addition, the requirement that a specified minimum amount be withdrawn from a RRIF each year after the RRIF is established will be waived for 2007 and 2008 in the case of RRIF annuitants who turn 70 years of age in 2007, and for 2007 in the case of RRIF annuitants who turn 71 years of age in 2007. A RRIF annuitant who is 71 years of age or younger at the end of 2007 will be able to reconvert the RRIF to an RRSP, so long as the re-established RRSP is converted to a RRIF before the end of the taxation year in which the individual turns 71 years of age.

Existing registered plan annuities will be permitted to be amended, without adverse tax consequences, to reflect the later conversion age. As well, employers will be allowed to amend their RPPs to allow benefits to accrue, and contributions to be made, in respect of employed members who are 71 years of age or younger at the end of 2007, subject to any otherwise applicable adjustments to pensions in pay.

RRSP Qualified Investments

The Income Tax Act specifies those investments that are qualified investments for RRSPs and other registered plans, in order to promote investment security and to prevent tax planning opportunities with respect to closely-held investments.

Qualified investments currently include many types of debt obligations and publicly-listed securities. Budget 2007 proposes to extend eligibility to:

• any debt obligation that has an investment grade rating and that is part of a minimum $25 million issuance; and


• any security (other than a futures contract) that is listed on a designated stock exchange. For this purpose, a designated stock exchange will include any stock exchange that is currently identified as a prescribed stock exchange. Further information on prescribed stock exchanges may be found under the heading "Prescribed Stock Exchanges" in this annex.

These changes will provide registered plan investors with greater investment choice and diversification opportunities by, for example, removing impediments to investing in foreign-listed trust and partnership units and Canadian dollar bonds issued by foreign entities, while recognizing the policy underlying the qualified investment rules.

These changes are effective after March 18, 2007.

Northern Residents Deduction

Individuals who live in prescribed areas in northern Canada for at least six consecutive months beginning or ending in a taxation year may claim the northern residents deduction for those years. The northern residents deduction is comprised of two amounts: a residency deduction of up to $15 per day, plus a deduction to offset taxable benefits in respect of up to two employer-paid vacation trips per year and an unlimited number of employer-paid medical trips. The amount that a taxpayer may deduct depends on whether the taxpayer resides in the Northern Zone (which is generally the most isolated) or the Intermediate Zone (which is generally less isolated). Residents of the Northern Zone are eligible for the full deduction, while residents of the Intermediate Zone are eligible for a half deduction.

Budget 2007 proposes to include the District Municipality of Mackenzie, in British Columbia, in the Intermediate Zone for the purposes of the northern residents deduction.

This amendment will apply to the 2007 and subsequent taxation years.

The 2010 Games in Vancouver

Canada, like other countries, generally taxes non-residents on their income from sources in this country. A non-resident's employment income, business income and property income (dividends, rents, royalties, interest, etc.) are all subject to Canadian income tax if they are earned in Canada. As well, goods that are imported into Canada may be subject to customs duties, excise taxes and GST/HST.

On July 2, 2003, Vancouver was chosen by the International Olympic Committee (IOC) as the Host City of the 2010 Winter Olympic and Paralympic Games (2010 Games). Many of the best athletes from all over the world will visit Canada for the Games, along with support staff, media and others. In the absence of special tax relief, some of these persons could be liable to Canadian taxes.

In recognition of the unique character of the Olympic and Paralympic movement, and as part of Canada's commitment to facilitate the hosting of this special event, Budget 2007 proposes to introduce a tax relief package with respect to the 2010 Games.

The package has three components. First, consistent with Canada's commitments in the context of the Vancouver games bid, Budget 2007 proposes to waive any non-resident withholding tax liability of the IOC and the International Paralympic Committee (IPC). In 2006, the IOC and IPC began receiving certain payments, such as royalties, from the Vancouver Organizing Committee (which is responsible for organizing the 2010 Games). These payments relate to, among other things, the use of intellectual property such as the Olympic identity. Under Canada's tax system, these payments are ordinarily taxable as Canadian-source property income. The proposed measures will relieve this tax for any payment made after 2005 and before 2011.

Second, Budget 2007 will ensure that non-resident athletes and other non-resident individuals are not taxed as a direct result of their participation in the 2010 Games. For example, Canadian-source income might arise if a non-resident athlete were paid by a commercial sponsor based on his or her 2010 Games performance. Or a foreign journalist who filed a story from the 2010 Games might be considered to be employed in Canada.

These two measures will be implemented through amendments to the Income Tax Act. Specifically, they will provide a non-resident withholding tax exemption for the IOC and the IPC, and an exemption from ordinary ("Part I") income tax for Canadian-source income earned in the context of the 2010 Games by the following non-residents:

• the IOC and the IPC and their members, officers, employees and contract workers;


• athletes representing countries other than Canada;


• officially registered support staff associated with teams from countries other than Canada (e.g. coaches, trainers);


• persons serving as games officials; and


• accredited foreign media organizations and their employees and contract workers.

The third component of the package relates to imported goods. Budget 2007 proposes to remit all or a portion of the customs duties, excise taxes and GST/HST on certain goods (such as personal effects, gifts, awards, display goods and equipment) imported into Canada in connection with the 2010 Games.

Mineral Exploration Tax Credit

Flow-through shares allow companies to renounce or 'flow through' tax expenses associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income. This facilitates the raising of equity to fund exploration by enabling companies to sell their shares at a premium. The mineral exploration tax credit is an additional benefit, available to individuals who invest in flow-through shares, equal to 15 per cent of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. After expiring at the end of 2005, the credit was re-introduced effective May 2, 2006 and is currently scheduled to expire at the end of March 2007.

Budget 2007 proposes to extend eligibility for the mineral exploration tax credit to flow-through share agreements entered into on or before March 31, 2008. Under the 'look-back' rule, funds raised with the benefit of the credit in 2008, for example, can be spent on eligible exploration up to the end of 2009.

Mineral exploration, as well as new mining and related processing activity that could follow from successful exploration efforts, can be associated with a variety of environmental impacts to soil, water and air. All such activity, however, is subject to applicable federal and provincial environmental regulations, including project-specific environmental assessments where required.

Business Income Tax Measures

Aligning Capital Cost Allowance Rates with Useful Life

A portion of the capital cost of a depreciable property is deductible as capital cost allowance (CCA) each year, with the CCA rate for each type of property set out in the Income Tax Regulations. Alignment of CCA rates with the useful life of assets ensures that the tax system accurately allocates the cost of capital assets over their useful lives. This can enhance productivity and standards of living through a more efficient allocation of investment across classes of assets.

 

Many factors affect the useful life of an asset, including changing technology and market conditions. As part of the Government's ongoing review of CCA rates, Budget 2007 proposes several adjustments to improve the CCA system, as shown in the table below.

Table A5.6
Proposed Increases to CCA Rates

Asset	Current Rate	New Rate
Buildings used for manufacturing or processing	4%	10%
Other non-residential buildings	4%	6%
Computer equipment	45%	55%
Natural gas distribution lines	4%	6%
Liquefied natural gas facilities	4%	8%

The Government will continue to assess the appropriateness of CCA rates to ensure that they reflect, as closely as possible, the useful life of assets.

Non-Residential Buildings

Currently, most buildings are eligible for a CCA rate of 4 per cent under Class 1 of Schedule II to the Income Tax Regulations.

Available evidence on the useful lives of buildings suggests that the current provisions do not reflect the useful life of manufacturing or processing buildings and other non-residential buildings. Budget 2007 proposes that the CCA rate for buildings used for manufacturing or processing in Canada of goods for sale or lease be increased to 10 per cent, and that the CCA rate for other non-residential buildings be increased to 6 per cent. These rates will be provided through an additional allowance of 6 per cent for buildings used for manufacturing or processing and 2 per cent for non-residential buildings. The half-year rule, which limits the CCA claim in the year an asset is acquired to one-half of the normal CCA deduction, will apply to these additional allowances.

In order to be eligible for one of the additional allowances, a building will be required to be placed into a separate class. If the taxpayer forgoes the separate class, the current treatment will apply (i.e. a CCA rate of 4 per cent). Further, at least 90 per cent of the building (measured by square footage) must be used for the designated purpose at the end of the taxation year. Buildings used for manufacturing or processing that do not qualify for the additional 6-per-cent allowance (i.e. because they do not meet the minimum eligible-use requirement) will be eligible for the additional 2-per-cent allowance if at least 90 per cent of the building is used for non-residential purposes at the end of the taxation year.

The additional allowances for manufacturing or processing buildings and other non-residential buildings will be available for buildings acquired by a taxpayer on or after March 19, 2007 (including new buildings any portion of which is acquired by a taxpayer on or after March 19, 2007, where the building was under construction on March 19, 2007) that have neither been used, nor acquired for use, before March 19, 2007.

Computers

Currently, computer equipment is generally eligible for a CCA rate of 45 per cent under Class 45 of Schedule II to the Income Tax Regulations.

A review of the CCA rate for computers indicates that a higher CCA rate would better reflect the useful life of these assets. Budget 2007 proposes to increase the CCA rate for computer equipment, of a type that is currently described in Class 45, to 55 per cent. The CCA rate of 55 per cent will apply to assets acquired on or after March 19, 2007. The current exemption for computers from the specified leasing property rules will be extended to computer equipment eligible for this higher CCA rate, other than any individual item with a capital cost in excess of $1 million.

In addition to setting the appropriate CCA rate, rules are needed to protect the integrity of the CCA system. These include the computer software tax shelter property rules, which limit the amount of CCA deductions that may be claimed by investors in respect of computer software to the amount of income from such property. This prevents CCA deductions from being used by investors to shelter other sources of income.

Budget 2007 proposes that the computer software tax shelter property rules be extended to computer equipment that is eligible for the CCA rate of 55 per cent proposed in this budget.

Natural Gas Distribution Pipelines

Natural gas distribution pipelines are pipelines through which natural gas is carried from transmission pipelines to consumers. They include both distribution mains, which run to the edge of a customer's property, and service lines, which run from the edge of the customer's property to the house or building. Currently, natural gas distribution pipelines are eligible for a CCA rate of 4 per cent under Class 1 of Schedule II to the Income Tax Regulations.

Evidence indicates that a higher CCA rate would better reflect the useful life of natural gas distribution pipelines. Budget 2007 proposes to increase the CCA rate for these assets to 6 per cent from 4 per cent. Eligible assets will include control and monitoring devices, valves, metering and regulating equipment and other equipment ancillary to a distribution pipeline, but not buildings or other structures.

The 6-per-cent CCA rate will apply to assets acquired on or after March 19, 2007 that have not been used or acquired for use before that date.

Liquefied Natural Gas Facilities

Natural gas can be cooled to a liquid state-liquefied natural gas (LNG)-thereby reducing its volume and facilitating its transportation or storage. LNG facilities include plants which liquefy the gas prior to shipment and those which regasify it after transport. Other facilities liquefy natural gas for storage during periods of low demand and regasify it for use during periods of high demand (so-called peak shaving plants).

LNG facilities are currently eligible for a CCA rate of 4 per cent under Class 1 of Schedule II to the Income Tax Regulations as "manufacturing and distributing equipment and plant (including structures) acquired primarily for the production or distribution of gas".

Evidence indicates that a higher CCA rate would better reflect the useful life of LNG facilities. Budget 2007 proposes that the CCA rate for LNG facilities (peak shaving plants, liquification plants and regasification plants) be increased to 8 per cent from 4 per cent. Eligible assets will be liquification and regasification equipment and related structures, including controls, pumps, vaporizers, and related storage tanks, but not property acquired for the purpose of producing oxygen or nitrogen, or buildings. For import/export terminals, eligible assets will also include loading and unloading pipelines used to transport the LNG between transport ships and the plant. Docks, breakwaters, wharfs, jetties and similar assets will be excluded.

The 8-per-cent rate will apply to assets acquired on or after March 19, 2007.

Accelerated Capital Cost Allowance for Oil Sands

Currently, most machinery, equipment and structures used to produce income from a mine or an oil sands project, including buildings and community infrastructure related to worker accommodations, are eligible for a capital cost allowance (CCA) rate of 25 per cent under Class 41 of Schedule II to the Income Tax Regulations. This rate also applies to assets owned by a mineral resource owner that are used in the initial processing of ore from the mineral resource or in upgrading of bitumen (the oil sands product) from that mineral resource into synthetic crude oil.

In addition to the regular CCA deduction, an accelerated CCA has been provided since 1972 for assets acquired for use in new mines, including oil sands mines, as well as assets acquired for major mine expansions (i.e. those that increase the capacity of a mine by at least 25 per cent). In 1996, this accelerated CCA was extended to in-situ oil sands projects (which use oil wells rather than mining techniques to extract bitumen) by deeming them to be mines. This change ensured that both types of oil sands projects are accorded the same CCA treatment. The 1996 changes also extended the accelerated CCA to expenditures on eligible assets acquired in a taxation year for use in a mine or oil sands project, to the extent that the cost of those assets exceeds 5 per cent of the gross revenue for the year from the mine or project.

The accelerated CCA takes the form of an additional allowance that supplements the regular CCA claim. Once an asset is available for use, the taxpayer is entitled to deduct CCA at the regular rate. The additional allowance allows the taxpayer to deduct in computing income for a taxation year up to 100 per cent of the remaining cost of the eligible assets, not exceeding the taxpayer's income for the year from the project (calculated after deducting the regular CCA). This accelerated CCA provides a financial benefit by effectively deferring taxation until the cost of capital assets has been recovered out of project earnings.

This incentive helped to offset some of the risk associated with early investments in the oil sands and contributed to the development of this strategic resource. Over time, however, technological developments and changing economic conditions have led to major investments that have moved the sector to a point where the majority of Canada's oil production will soon come from oil sands. As a result, this preferential treatment is no longer required.

As outlined below under "Accelerated Capital Cost Allowance for Clean Energy Generation", the existing provision that encourages industries including the oil sands to invest in equipment that generates energy more efficiently or by using renewable energy sources will be extended to equipment acquired before 2020 and expanded to cover additional applications. Going forward, the Government commits to identify additional areas where accelerated CCA and other measures can be used to help industries like the oil sands invest in promising new clean energy technologies like carbon capture and storage.

Budget 2007 proposes to phase out the accelerated CCA for oil sands projects-both mining and in-situ. The regular 25-per-cent CCA rate will remain in place.

To the extent that the accelerated CCA for oil sands projects induces incremental oil sands development that could contribute to environmental impacts, such as greenhouse gas emissions, air and water contaminants, water usage, and disturbance of natural habitats and wildlife, these changes could help reduce such incremental impacts.

To provide stability, and in recognition of the long time lines involved in some oil sands projects, the following transitional relief will be provided:

• the accelerated CCA will continue to be available in full for:

• for other assets, the additional accelerated allowance will be gradually phased down over the period from 2011 to 2015 (when it will be eliminated), according to the schedule set out below.

Full Accelerated CCA

As noted, the accelerated CCA will continue to be available in full for assets acquired by the taxpayer before March 19, 2007. It will also be available for assets acquired by the taxpayer before 2012 that are required to complete a project phase on which major construction by or on behalf of the taxpayer began before March 19, 2007.

A project phase is either the initial phase of a new project or a discrete expansion of an existing project. A phase refers to the installation of a group of assets which, when brought into use, results in a distinct increase in average daily output. A phase will generally be considered to be complete when the first incremental production related to that phase (other than test operations) comes on stream for a sustained period.

Major construction on a phase will be considered to have begun when physical fabrication or installation has begun on, or the taxpayer has acquired, buildings, structures or machinery and equipment in at least one of the major facilities required to complete that phase of the project. Construction must have been started by either the taxpayer or by a party with whom the taxpayer has a contract in writing (entered into before March 19, 2007) to construct the asset for the taxpayer.

Work preliminary to construction such as obtaining permits or regulatory approvals, conducting feasibility studies or environmental assessments, performing design or engineering work, clearing or excavating land, building roads, or entering into construction contracts will not be considered major construction.

Phase-Out Schedule

For assets that do not qualify for the full retention of the accelerated CCA as outlined above, the availability of the additional allowance will be gradually phased out in respect of claims made over the period from 2011 to 2015. In each year, a taxpayer will be permitted to claim a percentage of the amount of the additional allowance otherwise calculated under the existing rules. The percentage allowed will decline each calendar year, as follows (prorated for off-calendar taxation years):

Year	Allowable Percentage of Additional Allowance
2010	100
2011	90
2012	80
2013	60
2014	30
2015	0

This schedule will generally preserve a higher proportion of the accelerated CCA for projects that are relatively advanced on March 19, 2007.

The amount of the additional allowance will be reduced each year, regardless of whether the binding constraint is the level of project income or the amount of the undepreciated capital cost (UCC). However, any portion of the capital cost that is no longer deductible in a year under the additional allowance as a result of this limitation will result in a higher UCC at the end of the year, which is carried forward to the following year for calculation of both the regular CCA claim and the additional allowance for the following year.

The following is a simplified example illustrating operation of the phase-out.

 

Accelerated Capital Cost Allowance for Clean Energy Generation

A 50-per-cent accelerated CCA is provided under Class 43.2 of Schedule II to the Income Tax Regulations for specified energy generation equipment. Eligible equipment must generate either (1) heat for use in an industrial process or (2) electricity, by:

• using a renewable energy source (e.g. wind, solar, small hydro),


• using waste fuel (e.g. landfill gas, manure, wood waste), or


• making efficient use of fossil fuels (e.g. high efficiency cogeneration systems).

Class 43.2 was introduced in 2005 and is currently available for assets acquired on or after February 23, 2005 and before 2012. For assets acquired before February 23, 2005, accelerated CCA is provided under Class 43.1 (30 per cent). The eligibility criteria for these classes are generally the same except that cogeneration systems that use fossil fuels must meet a higher efficiency standard for Class 43.2 than that for Class 43.1. Systems that only meet the lower efficiency standard continue to be eligible for Class 43.1.

Where the majority of the tangible property in a project is eligible for Class 43.1 or Class 43.2, certain project start-up expenses (e.g. feasibility studies, engineering and design work) qualify as Canadian Renewable and Conservation Expenses (CRCE). They may be deducted in full in the year incurred, carried forward indefinitely for use in future years, or transferred to investors using flow-through shares.

The Government continues to review Class 43.2 on an ongoing basis to ensure inclusion of appropriate energy generation technologies that have the potential to contribute to energy efficiency and the use of alternative energy sources. Budget 2007 proposes to extend eligibility to an emerging source of renewable energy-wave and tidal energy-and to a broader range of applications involving active solar heating, photovoltaics, stationary fuel cells, production of biogas from organic waste, and pulp and paper waste fuels. Budget 2007 also proposes to extend eligibility for Class 43.2 to assets acquired before 2020. By encouraging investment in these technologies, these changes will contribute to a reduction in greenhouse gas emissions, improve air quality and promote the diversification of the energy supply.

Wave and Tidal Energy Equipment

New technologies are being developed and deployed that will harness the kinetic energy of the oceans-from waves and tidal currents-to produce electricity. Budget 2007 proposes to extend eligibility for Class 43.1 and Class 43.2 to include equipment that generates electricity using wave or tidal energy, provided they do not do so by means of a barrage or other dam-like structure. Eligible equipment will include support structures, control, conditioning and battery storage equipment, subsea cables and related transmission equipment, but will not include buildings, distribution equipment or auxiliary electrical generating equipment and any other property not used primarily for the purpose of the wave- or tidal-energy system.

The change will apply to eligible assets acquired on or after March 19, 2007.

Active Solar Equipment

Active solar technology captures and transfers solar energy by using a pump or fan to pass a liquid or gas medium through an above-ground solar collector, where the medium is heated by the sun. Typically the medium is then transported to a heat exchanger, where its energy is transferred and used, often to heat water. The heated water can then be used for various industrial, commercial and residential purposes.

Currently, Classes 43.1 and 43.2 include active solar equipment only if it is used to heat a liquid or gas for use in an industrial process or in a greenhouse. Active solar systems have limited industrial application, however, since they tend not to produce sufficient high-grade heat.

Budget 2007 proposes to extend eligibility for active solar systems under Class 43.1 and Class 43.2 to include other commercial and residential applications such as air and water heating, other than swimming pool heating. Examples include space heating of commercial and apartment buildings, and hot water heating for laundries, car washes and hotels.

Some active solar equipment may be treated as part of the building for CCA purposes (e.g. solar collectors that are integrated into the building). Eligibility will be clarified to ensure that such equipment can qualify for Class 43.1 and Class 43.2. Specifically, solar collectors, solar energy conversion equipment, solar water heaters, energy storage equipment, control equipment and equipment designed to interface solar heating equipment with other heating equipment will be eligible, but not equipment that distributes heated air or water within a building, which will continue to be considered part of the building. Structural components of a building such as framing or windows will not be eligible.

The changes will apply to eligible assets acquired on or after March 19, 2007.

Small Photovoltaic and Fixed-Location Fuel Cell Systems

Photovoltaic systems convert solar energy into electricity. Fuel cells use hydrogen to produce electricity, or electricity and heat. Both photovoltaic and fuel cell systems are eligible for Class 43.1 and Class 43.2 provided that they are fixed-location devices with a peak capacity of at least 3 kilowatts. Many applications for photovoltaics and fuel cells, however, are for systems that are less than 3 kilowatts in size.

Budget 2007 proposes that eligibility for Class 43.1 and Class 43.2 be modified to eliminate the minimum size requirement for both photovoltaic and fixed-location fuel cell systems. It will also be made clear that building-integrated photovoltaic systems are eligible for Class 43.1 and Class 43.2. Structural components of a building that are not solar cells or modules used to generate electricity using solar energy will not be eligible.

These changes will apply to eligible assets acquired on or after March 19, 2007.

Biogas Production Equipment

Class 43.2 includes equipment used to produce, store and use biogas from the anaerobic digestion of manure, provided the biogas is used primarily for the production of heat for use in an industrial process or electricity.

Anaerobic digestion is a biological process that produces biogas-principally composed of methane, the main component of natural gas-from organic wastes such as manure or food waste. A biogas plant consists primarily of a large, often heated, airtight tank in which bacteria act on the organic waste to produce gas. The gas is cleaned and can then be burned, like natural gas, to produce electricity or heat. Further processing of the residual waste may be undertaken to improve its quality for use as fertilizer.

Using a variety of feedstocks in an anaerobic digester can improve the efficiency of the digester by increasing the amount of biogas produced per tonne of input, making the project more economic and further encouraging use of waste fuels. After manure, food waste is considered to be the next major potential feedstock for anaerobic digesters. The primary source of food waste is expected to be from restaurants, food processors, breweries and other institutions with large food service facilities. Other potential feedstocks include wood waste and plant residues.

Budget 2007 proposes to extend the list of feedstocks that may be used in biogas production systems eligible for Class 43.1 and Class 43.2 to include food waste, plant residues, and wood waste.

This change will apply to eligible assets acquired on or after March 19, 2007.

Pulp and Paper Waste Fuels

Class 43.2 currently includes high-efficiency cogeneration systems if they use one or a combination of listed fuels. Class 43.1 also includes efficient cogeneration systems, but the efficiency threshold is less stringent. Many pulp and paper mills have cogeneration systems fired by wood waste, which is an eligible fuel. However, mills have access to other biomass-based waste fuels that are currently not eligible to be used in a qualifying cogeneration system.

Budget 2007 proposes to expand the list of fuels that can be used in cogeneration systems and systems that produce heat for use in an industrial process that are eligible for Class 43.1 and Class 43.2 to include the following waste fuels generated at pulp and paper mills:

• primary and secondary wastewater treatment sludges;


• de-inking sludge from the recycling of paper;


• tall oil soaps, crude tall oil and turpentine.

Primary wastewater treatment sludge is composed of wood fibre, bark, wood chips, some inorganic materials (metal, ink) and other debris such as gravel and sand. Secondary wastewater treatment sludge consists mostly of bacteria. De-inking sludge contains wood fibre and a significant quantity of clays from the de-inked paper. Tall oil soaps, crude tall oil and turpentine are all wood-derived by-products of the pulp and paper process.

In order to minimize the potential for harmful emissions from the combustion of wastewater treatment and de-inking sludges, and to maximize their renewable energy potential, these sludges will be required to be at least 40-per-cent solids immediately prior to being used as an eligible fuel. No such requirement will apply to tall oil soaps, crude tall oil, and turpentine.

These changes will apply to eligible assets acquired on or after March 19, 2007.

Biomass Drying and Other Fuel Upgrading Equipment

Further to the change proposed above, some pulp and paper mills will require special equipment to dry the sludge to at least 40-per-cent solids. Further, drying other forms of biomass, such as wood waste and the organic portion of municipal solid waste improves the heating value of the waste fuel and results in a net energy gain. Budget 2007 proposes that equipment that upgrades the combustible portion of the fuel be considered an eligible part of a cogeneration system under Class 43.1 and Class 43.2. Such equipment would include equipment used to dry wastewater treatment and de-inking sludges or other forms of biomass, such as wood waste and the organic portion of municipal solid waste. Gasification technologies, particularly for the gasification of biomass, which results in lower emissions of air pollutants, may also qualify if the other eligibility requirements for the cogeneration system of which they are a part are met.

This change will apply to eligible assets acquired on or after March 19, 2007.

Waste-Fuelled Thermal Energy Systems

Class 43.1 and Class 43.2 include systems that generate heat for use in an industrial process that are primarily fuelled by certain waste fuels (e.g. wood waste, landfill gas). There are currently no restrictions on the other fuels that may make up the rest of the fuel input. To ensure consistency with the fuel input requirements for eligible cogeneration systems, and ensure that unlisted fuels are not being used, Budget 2007 proposes to require that such equipment use exclusively specified fuels and fossil fuel.

This change will apply to eligible assets acquired on or after March 19, 2007.

Temporary Incentive for Manufacturing and Processing Machinery and Equipment

Currently, machinery and equipment used in manufacturing or processing is generally eligible for a CCA rate of 30 per cent under Class 43 of Schedule II to the Income Tax Regulations.

Budget 2007 proposes to temporarily increase the CCA rate for manufacturing and processing machinery and equipment, that would otherwise be included in Class 43, to a 50-per-cent straight-line rate. Taking into account the half-year rule, these assets may be written off on average over a two-year period, starting at the mid-point of the year in which the asset is acquired and ending at the mid-point of the second year following the acquisition. This results in an effective deduction rate of up to 25 per cent for the first year, up to 75 per cent for the second year (less any deduction claimed for the previous year), and up to 100 per cent for the third and subsequent years (less any deductions claimed for previous years).

The increased rate will apply to eligible machinery and equipment acquired on or after March 19, 2007 and before 2009.

Donation of Medicines for the Developing World

Donations by corporations of property held in inventory, to registered Canadian charities and other qualified donees, are eligible for a charitable donations deduction equal to the fair market value of the property gifted.

In order to provide an incentive for corporations to participate in international programs for the distribution of medicines, Budget 2007 proposes to allow corporations that make donations of medicines from their inventory to claim a special additional deduction equal to the lesser of

• 50 per cent of the amount, if any, by which the fair market value of the donated medicine exceeds its cost; and


• the cost of the donated medicine.

This additional deduction will be available only when the donee is a registered charity that has received a disbursement under a program of the Canadian International Development Agency, and the gift is made in respect of activities of the charity outside of Canada.

This measure will apply to gifts made on or after March 19, 2007.

International Taxation

Canada's international tax rules have two main components. The first is the Income Tax Act, which in addition to its purely domestic aspects sets out the statutory basis for taxing the Canadian-source income of non-residents as well as the foreign-source income of residents of Canada. Second, bilateral tax treaties ensure international co-operation in relieving double taxation and in preventing tax evasion. Given the unique strength of Canada's trading and business relationships with the United States, the Canada-U.S. tax treaty is generally viewed as one of the most important of these, but more than 80 other bilateral treaties also make up Canada's tax treaty network.

Budget 2007 announces important developments on both the treaty and the statutory aspects of the international tax system.

Canada-U.S. Tax Treaty: Elimination of Withholding Tax on Interest

Canadian and United States representatives have agreed in principle on the major elements of an updated Canada-U.S. Tax Treaty, with formal negotiations expected to conclude in the very near future.^[1] Most notably, under the proposed agreement cross-border interest payments will, once these changes are fully phased-in, no longer be subject to taxation by the source country (the country where the payor resides). Since the treaty currently allows the source country to impose a tax at a rate of up to 10 per cent, this change will reduce the cost of cross-border financing, have a positive effect on investment, simplify the tax system (as it will eliminate the distinction between arm's length and non-arm's length debt), and support the competitiveness of Canada's multinational enterprises.

For interest paid between unrelated (arm's length) persons, the elimination of withholding tax on interest will take effect as of the first calendar year following the entry into force of the treaty changes-that is, the first calendar year that begins after both countries have completed the procedures required to put the treaty changes into their laws. For non-arm's length (related party) interest payments, the maximum withholding rate will be reduced in three stages, as follows:

Year in Which Interest Is Paid	Maximum Rate of Source-Country Withholding Tax on Non-Arm's Length Interest
Current	10%
First year following entry into force of treaty	7%
Second year following entry into force of treaty	4%
Third and subsequent years following entry into force of treaty	0%

Once an exemption from withholding tax on both arm's length and non-arm's length interest is implemented in the Canada-U.S. Tax Treaty, it is proposed that Canadian withholding tax be eliminated on interest paid to all arm's length non-residents, regardless of their country of residence.

This legislated exemption from withholding tax would apply to interest paid on or after the date on which the withholding tax exemption in the proposed Canada-U.S. Tax Treaty comes into effect.

International Tax Fairness Initiative

A key element of any country's international income tax system is the tax treatment of the foreign-source business income earned by its residents, including the earnings of resident companies' foreign affiliates. For more than 30 years Canada has operated a complex system of foreign affiliate taxation. Budget 2007 proposes an International Tax Fairness Initiative that will update and improve that system, by:

• restricting the deductibility of interest paid on debt used to invest in foreign affiliates (and better defining the active business income of a foreign affiliate);


• enhancing Canada's ability to collect tax information from other jurisdictions, through revised tax treaties and Tax Information Exchange Agreements (TIEAs) with non-treaty countries;


• modifying the exemption from Canadian tax for foreign-source active business income, which is currently limited to income earned in countries with which Canada has a tax treaty, to also include income earned in a non-treaty jurisdiction which has signed a tax information exchange agreement with Canada; and


• providing additional funding for auditing and enforcement by the Canada Revenue Agency (CRA).

In addition, the Minister of Finance will create an advisory panel of tax experts to undertake further study and consultations, with a view to identifying additional measures to improve the fairness of Canada's system of international taxation. The panel will be asked to provide detailed recommendations to the Government for consideration in the 2008 budget.

Interest Deductibility for Foreign Active Business Income

Canada's system for taxing the income earned by Canadian corporations exempts from Canadian income tax the foreign-source active business earnings ("exempt surplus") of a foreign affiliate, both as that income is earned and when the earnings are subsequently repatriated to the Canadian parent company. The only geographic limitation on this exemption is that the income must be earned in a treaty country by a foreign affiliate that is resident in a treaty country. If the income is instead earned in a country that does not have a tax treaty with Canada, it will be taxable on repatriation, with a credit for taxes paid by the foreign affiliate.

The existing rules permit Canadian corporations to deduct interest expense on debt that is incurred for the purpose of financing foreign affiliates, even if the income generated in those affiliates may never bear Canadian tax. This creates a mismatch between income and expenses, and allows the interest deduction to shield other income (such as Canadian-source business income) from tax. As a result, the system may provide an incentive for taxpayers to locate debt in Canada while earning income in a foreign jurisdiction.

Budget 2007's International Tax Fairness Initiative will eliminate the deductibility of interest on debt incurred by corporations to finance foreign affiliates. This will be achieved through an adaptation of the existing "tracing" rules for interest. That is, while the deductibility of an interest expense will continue to depend on what the borrowed money giving rise to that expense is used for, the financing of a foreign affiliate will no longer support an immediate deduction. Instead, the interest expense will be pooled for deduction (net of exempt surplus received) if and as the foreign affiliate's shares generate non-exempt income for the corporation. In addition, the rule will be drafted to ensure that indirect financings cannot be used to avoid the application of this policy.

The restriction on interest deductibility will apply to interest payable after 2007 on new debt-debt incurred on or after March 19, 2007 (otherwise than pursuant to an agreement in writing entered into before that date). Existing non-arm's length debt will be subject to the restriction only for interest payable after 2008 or after the expiry of its current term, whichever is sooner. In recognition of the difficulties firms might have in restructuring arms-length debt, the restriction will apply to existing arm's length debt only for interest payable after 2009 or after the expiry of its current term, whichever is sooner.

The International Tax Fairness Initiative also proposes to narrow the current rules that deem certain passive income of a foreign affiliate to be active business income. Under current rules, Canadian companies can in certain circumstances ensure that their foreign affiliates' passive income (royalties, interest, lease revenue, etc.) is recharacterized as active business income, with the result that:

• the rules which tax passive income of controlled foreign affiliates in the hands of the Canadian corporation do not apply to that recharacterized income; and


• the income may be eligible to be repatriated to Canada free of Canadian tax.

This result is not appropriate where the Canadian company has little or no equity interest in the payor foreign corporation, as the Canadian company will not share in the profits of, or any increase in the value of, the payor foreign corporation.

Budget 2007 proposes that a Canadian taxpayer be required to have a qualifying interest (an existing concept in the income tax law-generally a direct or indirect economic interest of at least 10 per cent) in the paying entity in order to have these payments treated as active business income.

These changes will apply for taxation years of foreign affiliates that begin after 2008.

Improving Tax Information Exchange

Tax treaties enhance co-operation among tax administrations, including the sharing of tax information; but some tax treaties include inadequate tax information exchange rules. This, together with the absence of tax information exchange with non-treaty countries, can cause serious problems for tax administrators seeking to enforce the law. This is the case not only for the CRA, but for other countries' tax administrators as well. Member countries of the Organisation for Economic Co-operation and Development (OECD) are attempting to strengthen exchange of information by improving tax-treaty standards and through the adoption of Tax Information Exchange Agreements (TIEAs) with non-treaty jurisdictions.

To enhance Canada's network for the sharing of tax information, the International Tax Fairness Initiative proposes that Canada require that all new tax treaties and revisions to existing treaties (including treaties currently under negotiation) include the new OECD standards in relation to exchange of tax information.

In addition, as described below, the existing exemption for dividends received out of active business income earned by foreign affiliates resident in treaty countries will be extended to also include active business income earned by a foreign affiliate residing in a country that has agreed to a TIEA with Canada. This will give non-treaty countries an incentive to enter into TIEAs with Canada, as Canadian companies will then enjoy exempt surplus treatment in respect of active business income earned in that jurisdiction.

To increase the incentive for countries to enter into TIEAs with Canada, income earned by foreign affiliates in non-TIEA, non-treaty countries will be taxed in Canada on an accrual basis-that is, as it is earned. In the case of TIEA negotiations that begin after March 19 2007, this treatment will apply if those negotiations are not successfully completed after the passage of five years from the earlier of the commencement of TIEA negotiations and the date on which Canada proposed the negotiations. In the case of a country that is already in the process of negotiating a TIEA with Canada, this treatment will apply if the negotiations are not successfully completed before 2014. Canada will give public notice of its invitations for TIEA negotiations.

Updating the Scope of Exempt Surplus

The existing foreign affiliate rules make a link between exempt surplus and tax treaties. As described above, only active business income that is earned in a tax-treaty country can qualify for the exemption. This requirement stems from the context in which the rules were first implemented. At that time-the mid-1970s-Canada had relatively few tax treaties, and it was expected that tax treaties would be concluded only with countries that had tax systems that were generally comparable to Canada's, including corporate income tax rates resembling those imposed in Canada.

The exemption could thus be seen as a simpler alternative to the foreign tax credits that Canada would otherwise have to give its residents in respect of business income earned in the treaty country. Granting the exemption in respect of tax treaty countries was also an incentive for countries to enter into treaties with Canada.

Canada now has tax treaties with virtually all industrialized countries and many in the developing world, leaving little need to provide incentives for more treaties. Moreover, because trade and other non-tax imperatives have caused Canada to sign tax treaties with some countries that do not impose tax at anything near Canadian rates, the relationship between tax treaties and exempt surplus has become less easily justified.

The resolution of the problems around the deductibility of interest used to fund untaxed income provides an opportunity to de-link the exemption from the presence of a tax treaty. The International Tax Fairness Initiative modifies the scope of exempt surplus. In addition to its existing application in respect of treaty countries, the exemption will be extended to active business income from non-treaty jurisdictions that agree to exchange tax information with Canada.

Foreign Affiliate Technical Amendments Proposals

Proposals that would modify the income tax rules that provide for the determination and the taxation of income of foreign affiliates of taxpayers resident in Canada have previously been released for public comment. These proposals will be reviewed and evaluated in the light of the measures proposed in the International Tax Fairness Initiative, to ensure the appropriate functioning of the system at a technical as well as a policy level.

Prescribed Stock Exchanges

To lower tax barriers to international investment, and to be responsive to the evolution of financial markets, Budget 2007 proposes to update the concept of "prescribed stock exchange" that is currently used for a variety of purposes under the Income Tax Act.

Current Use of the "Prescribed Stock Exchange" Concept

The Income Tax Act treats securities (especially company shares) listed on a "prescribed stock exchange" differently from those that are not. An exchange-or a part of an exchange-is prescribed if it is identified in one of two lists contained in the Income Tax Regulations (one list identifies domestic stock exchanges that are prescribed and the other identifies foreign stock exchanges that are prescribed). If a stock exchange is prescribed, a share listed on the exchange is subject to a number of tax consequences, for example:

• the share is a qualified investment for RRSP purposes;


• even if it is a share of a Canadian company, the share will in many cases not be "taxable Canadian property"-meaning that a non-resident who disposes of the share will not be subject to Canadian tax on the resulting capital gain;


• if the share is taxable Canadian property, a person who acquires it from a non-resident is exempted from the usual requirement to withhold a portion of the proceeds on account of the non-resident's potential Canadian tax liability (the withholding procedure under section 116 of the Income Tax Act);


• the share may be lent under a securities lending arrangement;


• there is a capital gains exemption for certain charitable donations of the share;


• where the prescribed stock exchange in question is located in Canada, the corporation that issued the share is a public corporation for tax purposes; and


• where the share is acquired under an employee stock option, the employee may be able to defer taxation of the associated employment benefit.

Although being listed on a prescribed stock exchange subjects a security to these and other tax consequences, different tax policy objectives underlie the various references to this concept in the Income Tax Act. For example, the RRSP rules are meant to ensure that retirement savings are held in relatively liquid and well-governed markets. This requires stringent criteria such as an assurance that the exchange is properly governed and that non-arm's length dealings are adequately monitored. On the other hand, the use of this concept in the securities lending rules is simply an indirect way of ensuring that a security is listed and traded in a public market.

As exchanges are created, reorganized and renamed, and as Canadian businesses and investors expand into new markets, they often seek to have additional exchanges prescribed. Because different tax policy goals are currently served by the same concept, with the result that all of the tax consequences discussed above flow from prescription, the most stringent tests have to be applied to every candidate exchange even if a less strict test would satisfy the purpose for which prescription is sought. This can delay the accommodation of a new exchange, and may cause unnecessary difficulties for Canadian businesses and investors.

Proposed Changes

To make the prescription process more responsive to evolving market needs, and to make the concept more flexible while preserving the underlying tax policy goals, Budget 2007 proposes to replace the two lists of currently prescribed stock exchanges with a new 3-tier system:

Designated Stock Exchange

This category will consist of stock exchanges that have been designated by the Minister of Finance, and will include all existing stock exchanges that are currently prescribed in the Income Tax Regulations. The Minister's designation, which will be carried out by way of public notice, will be both necessary and sufficient for a stock exchange to be a designated stock exchange.

This category will initially apply for the purposes of all current references to "prescribed stock exchange" in the Income Tax Act, other than the section 116 withholding procedure and the securities lending rules.

Recognized Stock Exchange

This category will consist of stock exchanges that are located in Canada or in another country that is a member of the Organisation for Economic Co-operation and Development and that has a tax treaty with Canada. This category will also include all designated stock exchanges. There will be no formal identification of recognized stock exchanges; a stock exchange is a recognized stock exchange based strictly on its location, and not (except in the case of a designated stock exchange) by any action on the part of the Minister.

This category will apply for the purpose of the section 116 withholding procedure, meaning that non-resident vendors of shares listed on one of these exchanges will be exempt from the capital gains tax withholding requirement. (However, whether or not the shares are taxable Canadian property will be unaffected).

Stock Exchange

This category will include any stock exchange, regardless of where located, and will include all designated and recognized stock exchanges. As in the case of a recognized stock exchange, there will be no process by which an entity is formally identified as a "stock exchange". Instead, it is intended that the general legal and commercial meaning of the term will govern. This category will be used for the purposes of the securities lending rules.

At the outset, most tax provisions that now refer to "prescribed stock exchange" will refer to "designated stock exchange". Over time, the Government will review the appropriateness of using the second and third categories for certain of those provisions.

The new system will lower tax barriers both for domestic investors in international markets and for international investors in Canadian companies. It will also expedite the recognition of new and reorganized stock exchanges (such as the Alternative Investment Market of the London Stock Exchange and NYSE Arca).

These changes are proposed to be effective upon Royal Assent to the necessary amending legislation.

Investment Tax Credit for Child Care Spaces

Budget 2007 proposes to introduce a tax credit to encourage businesses to create licensed child care spaces for the children of their employees and, potentially, for children in the surrounding community. The tax credit, which will be delivered as part of the existing investment tax credit provisions, will be available to eligible businesses that create one or more new child care spaces in a new or existing licensed child care facility.

The measure will provide eligible taxpayers with a non-refundable investment tax credit equal to 25 per cent of eligible expenditures, to a maximum credit of $10,000 per child care space created. Taxpayers eligible for this new credit will be those that carry on a business in Canada. Further, the provision of child care spaces must be ancillary to one or more businesses of the taxpayer that do not include the provision of such spaces.

Eligible expenditures will include the cost of depreciable property (other than specified property) and the amount of specified start-up costs, acquired or incurred solely for the purpose of the creation of the new child care space at a licensed child care facility.

Eligible depreciable property will include the cost or incremental cost of the building or portion of the building in which the child care facility is located, as well as the cost of furniture, appliances, computer equipment, audio-visual equipment, playground structures and playground equipment. The specified start-up costs will include initial start-up costs such as landscaping costs for the children's playground, architect's fees, costs of initial regulatory inspections, initial licensing fees, building permit costs and costs to acquire children's educational material.

Eligible expenditures will not include specified property. Specified property will include motor vehicles and property that is, or is located in or is attached to, a residence of the employer, of an employee of the employer, of a person who holds an interest in the employer, or of any person related to the employer. The credit will not be available for any of the ongoing or operating expenses of the child care facility such as supplies, wages, salaries, utilities, etc.

Unused credits may be carried back 3 years and forward 20 years by eligible taxpayers to reduce federal income taxes otherwise payable in those years. All or part of the credit arising in respect of the cost of the acquired property upon which a taxpayer's credit is computed will be recaptured in certain circumstances. The credit will be recovered against the investment tax credit balance if, at any time within the five calendar years after the creation of the new child care space, the new child care space ceases to be available or property that was an eligible expenditure in respect of the child care space is sold, or leased, to another person or is converted to another use.

The amount to be recaptured will be 25 per cent of the lesser of

• the eligible expenditure that was taken into account in determining the credit, and


• the proceeds of disposition of the eligible property or, if the eligible property is disposed of to a related party, the fair market value of the property at the time of the disposition.

If the application of the recapture rule results in an investment tax credit balance at the end of a taxation year being less than zero, the taxpayer will be required to add the negative balance to tax payable.

The tax credit will be available in respect of eligible expenditures that are incurred on or after March 19, 2007.

Remittance and Filing Thresholds

Small businesses face challenges in handling the paperwork associated with filing tax forms and remitting taxes. Budget 2007 proposes to ease the paperwork burden by reducing the frequency of tax remittances and filings for small businesses. Currently, and depending on the amount of its payroll, sales and income tax liability, a small business could have 34 remittance and filing requirements in these areas per year. These proposed changes will reduce the filing and remitting requirements of more than 350,000 small businesses by, on average, about one-third. For smaller businesses, the reduction could be as much as 70 per cent.

Increasing Corporate Income Tax Instalment Threshold to $3,000 and Reducing Instalment Frequency for Small Businesses

Currently, all corporations are required to pay their taxes either annually or in monthly instalments. Corporations must pay income tax in monthly instalments unless the total of the taxes under Part I (income tax), Part VI (minimum tax on financial institutions), Part VI.1 (taxable preferred shares) and Part XIII.1 (authorized foreign banks) of the Income Tax Act payable for either the previous year or the current year (determined before taking into consideration the "specified future tax consequences", as the term is defined in the Income Tax Act) does not exceed $1,000.

Budget 2007 proposes to triple, to $3,000 from $1,000, the threshold amount above which corporations are required to pay corporate income tax by instalment. This threshold change will apply in respect of corporate taxation years that begin after 2007. The balance-due day for the final payment of corporate tax for a taxation year will remain unchanged. The Canada Revenue Agency (CRA) will continue to notify corporations as to whether instalments are required.

Budget 2007 also proposes that, for small Canadian-controlled private corporations (CCPCs) that are required to pay tax instalments, the frequency of instalment payments be reduced from monthly to quarterly if (as adjusted to take into account groups of associated corporations):

• the taxable income of the corporation for either the current or previous year does not exceed $400,000;


• the corporation qualified for the small business deduction for either the current or previous year;


• the taxable capital employed in Canada of the corporation does not exceed $10 million in either the current or previous year; and


• the corporation has no compliance irregularities under the Income Tax Act and Part IX (the goods and services tax/harmonized sales tax (GST/HST) portion) of the Excise Tax Act during the preceding 12 months (generally the same requirement that currently applies under provisions allowing certain employers to remit source deductions quarterly).

There will be three methods available to determine the quarterly instalment amounts:

• four instalments equal to 1⁄4 of the estimated tax payable for the current taxation year;


• four instalments equal to 1⁄4 of the tax payable for the previous taxation year; or


• a first instalment equal to 1⁄4 of the tax payable for the second preceding year, with the remaining three instalments being equal to 1⁄3 of the amount, if any, by which the tax payable for the previous taxation year exceeds the first instalment paid for the current taxation year.

Quarterly instalments will be available for eligible CCPCs in respect of corporate taxation years that begin after 2007. The quarterly instalments will be due on the last day of each quarter of the corporation's taxation year.

The CRA will continue to notify corporations which are required to remit instalments of the amount of each instalment, determined on the basis of tax information that is available to the CRA. A corporation that fails to make a quarterly instalment payment by its due date will be required to make monthly instalment payments beginning with the following month. The balance-due day for the final payment of corporate taxes will remain unchanged.

Increasing Personal Income Tax Instalment Threshold to $3,000

Currently, individuals (including many who are self-employed or seniors) are required to make quarterly instalment payments in respect of income taxes, if the estimated income tax payable (federal/provincial) for the current year, or the actual income tax payable for either of the two preceding years, exceeds the amounts withheld at source in respect of those years by an amount that is greater than the instalment threshold amount of $2,000. The $2,000 threshold is adjusted for Quebec residents to $1,200 of federal tax payable after federal tax withholdings, because the federal government collects only its portion of income taxes in Quebec.

Budget 2007 proposes to increase this instalment threshold amount to $3,000 ($1,800 for individuals resident in Quebec). The balance of the taxes payable for a taxation year will continue to be due on April 30 of the following taxation year.

This change will also apply to self-employed individuals whose chief source of income is from farming or fishing. These individuals are currently eligible for a special instalment rule under which they are required to make only one instalment payment per year (on or before December 31). These individuals will no longer have to pay their income tax by instalment, if the estimated income tax payable (federal/provincial) for the current year, or the actual income tax payable for either of the two preceding years, does not exceed the amounts withheld at source in respect of those years by an amount that is greater than the new instalment threshold amount of $3,000 ($1,800 for individuals resident in Quebec).

These changes to the instalment threshold amounts will apply to the 2008 and subsequent taxation years. The CRA will continue to notify individuals who are required to remit instalments of the amount of each instalment, determined on the basis of tax information that is available to the CRA. The method for determining the amount of instalments will remain unchanged.

Increasing Quarterly Instalment Remittance Threshold for Source Deductions to $3,000

Currently, an employer is entitled to remit source deductions in respect of employees' income tax, Canada Pension Plan contributions and Employment Insurance premiums by quarterly instalment, instead of monthly instalment, if the average monthly withholding amount (as defined in the Income Tax Regulations) for either of the two preceding calendar years is less than $1,000 and the employer has perfect compliance history. Budget 2007 proposes to triple this threshold amount to $3,000. In this context, perfect compliance history means that the employer has remitted its taxes payable and filed all of the required returns on time, under both the Income Tax Act and Part IX (GST/HST portion) of the Excise Tax Act, during the preceding 12 months.

These changes to the Income Tax Regulations will apply to calendar years beginning with 2008. The CRA will, at the beginning of each calendar year, continue to notify employers of their source deduction remittance requirements on the basis of source deduction information from preceding years. Other existing rules, such as those applicable to associated corporations, T4 summary reporting, and multiple payroll accounts will continue to apply.

Changes to the Canada Pension Plan and Employment Insurance regimes will also be made to mirror the changes to the Income Tax Regulations.

Increasing GST/HST Annual Filing and Annual Remittance Thresholds

To minimize GST/HST compliance costs, small and medium-sized businesses may reduce their filing frequency by using annual or quarterly reporting periods. Larger businesses are required to file monthly.

GST/HST registrants with taxable supplies that do not exceed $500,000 in a fiscal year may elect to have reporting periods that are fiscal years, which enables them to file an annual GST/HST return and make quarterly instalment payments. Also, if their GST/HST net tax payable for the reporting period or the preceding reporting period is less than $1,500, only one "annual" remittance of tax is required for the period.

To further reduce the paper burden of small and medium-sized businesses, Budget 2007 proposes to:

• triple the taxable supplies threshold, at or below which registrants can file a GST/HST return annually, to $1,500,000 from $500,000; and


• double the net tax threshold, below which annual GST/HST filers can make one tax remittance, to $3,000 from $1,500.

These measures will apply to fiscal years that begin after 2007.

Sales and Excise Tax Measures

Foreign Convention and Tour Incentive Program

On September 25, 2006, the Government of Canada announced proposed amendments to the Excise Tax Act that would eliminate the Visitor Rebate Program effective April 1, 2007. Budget 2007 confirms the elimination of the Visitor Rebate Program. This measure will apply to the goods and services tax/harmonized sales tax (GST/HST), including the provincial component of the HST.

Budget 2007 proposes a new Foreign Convention and Tour Incentive Program that will replace the Visitor Rebate Program. This program will provide GST relief in respect of certain property and services used in the course of conventions held in Canada and the accommodation portion of tour packages for non-residents, as outlined below. References to GST should be read as references to the GST and the federal component of the HST.

These proposed amendments will apply as follows:

Conventions

Sponsors and Organizers of Foreign Conventions

A sponsor or non-GST/HST registered organizer of a foreign convention in Canada (generally, a convention where at least 75 per cent of participants are non-residents and the sponsor is a non-resident) that begins after March 31, 2007 will be eligible for a rebate of GST in respect of the convention facility or supplies relating to the foreign convention held in Canada.

Admissions to Conventions

For Canadian conventions that begin after March 31, 2007, sponsors will not be required to charge non-resident attendees GST on the portion of the admission that is reasonably attributable to the provision of the convention facility or related convention supplies, and on 50 per cent of the portion of the admission fee that is reasonably attributable to food and beverages.

A sponsor of a foreign convention will not be required to charge GST on any admission to the convention (whether the attendee is resident or non-resident).

Exhibitors

A non-resident exhibitor at a foreign or Canadian convention that begins after March 31, 2007 will either not be required to pay GST or be eligible for a rebate of GST in respect of the use of the convention site and any related convention supplies acquired by the exhibitor in respect of the convention.

Rebate Claims Process

A sponsor or non-GST/HST registered organizer of a foreign convention or a non-resident exhibitor will be entitled to file a rebate claim directly with the Canada Revenue Agency (CRA) for GST paid in respect of a convention facility or supplies related to the convention.

A GST/HST registered supplier that is an organizer of a foreign convention, an operator of a convention facility or a supplier of accommodation in connection with a foreign convention will be able to credit the amount of the rebate directly to sponsors and non-GST/HST registered organizers and claim a deduction equal to that amount on its GST/HST return.

• If a supplier claims such a deduction, the supplier will be required to file with the relevant GST/HST return prescribed information with respect to the credited amounts.


• To ensure that the prescribed information is filed, suppliers will be subject to interest for late filing, and if the information is not filed within a specified period of time, the deduction will be recaptured and interest charges will apply.


• This requirement for claiming a deduction will apply to a supply of a convention facility or a supply related to the convention for which GST becomes payable after March 31, 2007.

Tour Packages

A non-resident individual who acquires a tour package where the first night of accommodation in Canada is after March 31, 2007 will be entitled to a rebate of GST in respect of the accommodation portion of that tour package. Likewise, a non-GST/HST registered non-resident supplier that supplies to a non-resident a tour package where the first night of accommodation in Canada is after March 31, 2007 will be entitled to a rebate of GST in respect of the accommodation portion of that tour package.

Rebate Claims Process

A non-resident individual or non-resident supplier of a tour package will be entitled to file a rebate claim directly with the CRA for GST paid in respect of the accommodation portion of the tour package.

A GST/HST registered supplier of accommodation that is not part of a tour package will not be able to credit the amount of the rebate with respect to the accommodation to a non-resident supplier of a tour package if the GST in respect of the accommodation becomes payable after March 31, 2007.

A GST/HST registered supplier of a tour package will be able to credit the amount of the rebate with respect to the accommodation directly to non-resident individuals or non-resident suppliers of a tour package and then claim a deduction equal to that amount on its GST/HST return.

• If a supplier claims such a deduction, the supplier will be required to file with the relevant GST/HST return prescribed information with respect to the credited amounts.


• To ensure that the prescribed information is filed, suppliers will be subject to interest for late filing, and if the information is not filed within a specified period of time, the deduction will be recaptured and interest charges will apply.


• This requirement for claiming a deduction will apply to supplies of tour packages for which GST becomes payable after March 31, 2007.

48-Hour Travellers' Exemption

Under existing provisions in the Customs Tariff, Canadian travellers may qualify for an exemption which allows returning residents to bring back goods up to a specified dollar limit without having to pay duties or taxes, including customs duty, GST/HST and federal excise tax. Further, the provinces generally provide a matching exemption from provincial sales and product taxes.

Budget 2007 proposes to increase the travellers' exemption to $400 from $200 for returning Canadian residents who are out of the country for 48 hours or more. Increasing the 48-hour exemption will make it more convenient for travellers to clear customs and will reduce the amount of processing at the border.

The dollar limits that apply to the 24-hour and 7-day duty- and tax-free exemptions will remain unchanged at $50 and $750 respectively. Volume and quantity limits on alcohol and tobacco products also remain unchanged.

The new exemption, to be given effect by amendments to the Customs Tariff and the Excise Tax Act, will be effective in respect of travellers returning to Canada on or after March 20, 2007.

Exports of Intangible Personal Property

Technological change, such as the widespread use of the Internet, has greatly increased the variety and economic significance of products that can be supplied in intangible form. Currently, supplies of intangible personal property (IPP) that may not be used in Canada, as well as supplies of intellectual property (such as patents and trademarks) to non-registered non-residents, are not subject to GST/HST.

To ensure that exports of IPP are not subject to GST/HST, Budget 2007 proposes that all supplies of IPP made to non-residents who are not registered for GST/HST purposes be zero-rated, except for the following:

• a supply of IPP made to an individual who is physically present in Canada when the supply is made;


• a supply of IPP that relates to real property situated in Canada or tangible personal property ordinarily situated in Canada;


• a supply of IPP that relates to a service the supply of which is made in Canada and is not a zero-rated export;


• a supply of IPP that may only be used in Canada; and


• a supply of IPP that is prescribed by regulations (although no supply is currently envisaged to be so prescribed).

Zero-rating under the proposed measure will apply to supplies made after March 19, 2007 and supplies made on or before March 19, 2007 if GST/HST was neither charged nor collected in respect of the supply.

Consequential changes are also proposed to the rules governing self-assessment under Division IV of Part IX of the Excise Tax Act to ensure that GST/HST will apply appropriately in respect of IPP acquired on a zero-rated basis under the proposed measure and consumed in furthering domestic activities.

GST/HST Remission-Certain School Authorities

Budget 2007 proposes to remit GST/HST paid in respect of student transportation services to certain school authorities that were reassessed pursuant to a measure that was announced in 2001 and enacted in 2003, despite the fact that the Tax Court of Canada had rendered decisions in their favour after the measure was announced. The proposed remission addresses these exceptional circumstances.

It continues to be the Government's policy that the provision of student transportation services by school authorities be treated as an exempt activity under the GST/HST.

Removal of Excise Tax Exemption for Renewable Fuels

Under the Excise Tax Act, renewable fuels are currently exempt from the federal excise taxes of 10-cents-per-litre on gasoline and 4-cents-per-litre on diesel fuel, that would otherwise apply to their use as motive fuels. The exemptions were introduced in 1992 and 2003, respectively, to encourage the use and production of renewable fuels in Canada.

As part of its environmental agenda, the government has recently announced a series of measures to ensure that renewable fuels play a much greater role in Canada. The new measures include a regulated requirement for renewable content in gasoline and diesel fuel, an operating incentive for the production of renewable fuels in Canada, the provision of funds to encourage the participation of agricultural interests and rural communities in the bioproducts sector, and investments in next-generation technologies. These measures represent a comprehensive commitment to renewable fuels, and provide a more significant incentive than the excise tax exemptions.

Budget 2007 proposes that the Excise Tax Act be amended to repeal the excise tax exemptions for renewable fuels, including biodiesel and alcohol-based fuels, and to ensure that renewable fuels are included within the excise tax structure that applies to gasoline and diesel fuel.

These measures will apply to fuel delivered on or after April 1, 2008.

Green Levy on Fuel-Inefficient Vehicles

Budget 2007 introduces a vehicle efficiency incentive (VEI) designed to promote the purchase of fuel-efficient vehicles in Canada. The VEI structure includes a rebate for highly fuel-efficient vehicles (as described in Chapter 3, "A Cleaner, Healthier Environment"), neutral treatment for vehicles of average fuel efficiency and a new Green Levy on fuel-inefficient vehicles.

The Green Levy will apply to new automobiles designed primarily to carry passengers, including station wagons, vans and sport utility vehicles, but not pickup trucks, in accordance with the vehicle's fuel-efficiency rating. This rating will be calculated on the basis of weighted average fuel consumption taking into account 55 per cent of city fuel consumption and 45 per cent of highway fuel consumption, as determined in accordance with information published by the Government of Canada under the EnerGuide mark, such as the 2007 Vehicle EnerGuide. Vehicles that have a weighted average fuel consumption of 13 or more litres per 100 kilometres will be subject to the levy at the following rates:

• at least 13 but less than 14 litres per 100 kilometres, $1,000;


• at least 14 but less than 15 litres per 100 kilometres, $2,000;


• at least 15 but less than 16 litres per 100 kilometres, $3,000; and


• 16 or more litres per 100 kilometres, $4,000.

The Green Levy will be imposed under the Excise Tax Act (ETA) and will be payable by the manufacturer or importer at the time vehicles are delivered to a purchaser (usually a dealer) or imported. The levy will not apply to vehicles that are manufactured in Canada and exported for sale in other countries, or to vehicles that are imported and subsequently exported.

The Green Levy will be based largely on existing provisions in the ETA pertaining to the heavy vehicle tax, thereby facilitating and simplifying administration of the levy and compliance by business. These provisions would include, for example, existing administrative provisions of the ETA such as those pertaining to filing requirements for returns, remittances, and penalties and interest, as well as more specific rules that deem certain importers and wholesalers of vehicles to be manufacturers of vehicles, and those vehicles to have been manufactured in Canada, thereby delaying payment of the levy until the vehicles are delivered to a dealer.

The Green Levy will apply to new vehicles delivered or imported after March 19, 2007. The inventory of vehicles held by dealers on March 19, 2007 will not be subject to the levy, allowing dealers to sell these vehicles to final consumers without the application of the levy. As well, vehicles for which an agreement in writing between a dealer and a final consumer was entered into before March 20, 2007 will not be subject to the levy, provided the final consumer takes possession of the vehicle before July 2007.

The Green Levy will also apply to imported used vehicles put into service after March 19, 2007. This approach ensures that imported used vehicles will not have an unfair advantage compared to vehicles delivered in Canada after March 19, 2007, which will be subject to the levy.

Concurrent with the introduction of the new Green Levy on fuel-inefficient vehicles, the heavy vehicle tax will be repealed for vehicles delivered or imported after March 19, 2007.

Excise Tax on Diesel Fuel-End-User Refunds

An excise tax is imposed under the Excise Tax Act (ETA) on diesel fuel manufactured and sold in, or imported into, Canada. The excise tax is imposed at a rate of 4 cents per litre and is generally payable by the manufacturer at the time of delivery to a purchaser and by the importer at the time of importation.

The ETA contains a limited number of provisions that relieve the application of the excise tax on diesel fuel in specific circumstances. These provisions include relief for diesel fuel used as heating oil or to generate electricity. Relief is also provided for excise taxes paid on goods, including diesel fuel, sold for use as ships' stores.

Each of these relieving provisions is conditional on the end-use of the diesel fuel. Since the excise tax is imposed and payable prior to the end-use, it is not always possible to know at the time of delivery whether excise tax should be relieved. In these circumstances, the diesel fuel must be sold on a tax-paid basis. In order to give effect to the relieving provisions in the ETA, the Canada Revenue Agency (CRA) allows end-users to file refund claims in respect of diesel fuel that was purchased on an excise tax-paid basis and subsequently used in exempt circumstances.

Budget 2007 proposes to clarify the legislative authority that underlies the CRA's longstanding administrative practice of paying end-user refunds. The amendments will apply from the date on which the excise tax on diesel fuel was introduced, for end-user refund claims filed after that date, in accordance with the terms and limitations set out in the ETA.

For end-user refund claims filed after March 19, 2007, proposed amendments to the ETA will also clarify that, where diesel fuel has been sold on a tax-paid basis for use as heating oil or to generate electricity, only the end-user (or vendor of heating oil) will be entitled to claim a refund of excise tax.

Other Measures

Aboriginal Tax Policy Measures

Taxation is an integral part of good governance as it promotes greater accountability and self-sufficiency and provides the revenues for important public services and investments. Therefore, the federal government supports initiatives encouraging the exercise of direct taxation powers by Aboriginal governments.

To date, the federal government has entered into 22 sales tax arrangements whereby Indian Act bands and self-governing Aboriginal groups levy a sales tax within their reserves or their settlement lands that is integrated with the federal GST. In addition, 12 arrangements respecting personal income taxes are in effect with self-governing Aboriginal groups under which they impose a personal income tax on all residents within their settlement lands. The federal government reiterates its willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal governments.

The federal government also supports direct taxation arrangements between interested provinces or territories and Aboriginal governments and enacted legislation to facilitate such arrangements in 2006.

Single Administration of Ontario Corporate Tax

The federal government currently collects corporate income tax for all of the provinces and territories, other than the provinces of Alberta, Ontario and Quebec. On October 6, 2006, the governments of Canada and Ontario signed a Memorandum of Agreement regarding the collection and administration, by the Government of Canada, of Ontario's corporate tax for taxation years that end after 2008. The agreement will reduce compliance costs for businesses and enable the Canada Revenue Agency (CRA) to streamline service and reduce overall administrative costs.

The Memorandum of Agreement includes a commitment by Canada to provide financial assistance to the province of Ontario in order to ensure a smooth transition to a single corporate tax administration. Budget 2007 proposes to provide legislative authority for the Minister of Finance to make payments to Ontario totaling $400 million. The payments will be made in two instalments: $250 million payable on October 1, 2007, and $150 million payable on October 1, 2008.

Payment of Provincial Sales Taxes by Federal Crown Corporations

Federal and provincial governments have entered into Reciprocal Taxation Agreements (RTAs) under which they agree to pay certain consumption taxes and fees imposed by each other.

Where an RTA is in place, the Federal-Provincial Fiscal Arrangements Act (FPFAA) requires federal Crown corporations listed in Schedule I of the FPFAA to pay provincial taxes and fees. Budget 2007 proposes to amend the FPFAA to clarify that, where the requirement to pay provincial taxes and fees applies to a federal Crown corporation listed in Schedule I of the FPFAA, it also applies to the corporation's wholly-owned subsidiaries. The proposed amendment will apply from July 1, 2000, in order to cover the application period of all RTAs currently in place.

Provincial Capital Taxes

Many provinces are in the process of reducing or phasing out their capital taxes. To help provinces eliminate their capital taxes as soon as possible, Budget 2007 proposes a temporary financial incentive for provincial governments to eliminate their capital taxes. To be eligible for the federal payment, a province must eliminate its currently existing general capital tax or capital tax on financial institutions, or restructure a currently existing capital tax on financial institutions into a minimum tax on financial institutions. The elimination or restructuring must take effect on or before January 1, 2011, and the enabling legislation must be enacted on or after March 19, 2007 and before 2011.

In order for a province to receive the new financial incentive for restructuring an existing capital tax on financial institutions into a minimum tax, the restructured tax must have both of the following characteristics:

• the level of revenues it raises is broadly commensurate with the corporate income tax; and


• the financial institution is able to reduce the tax by the amount of income tax it pays, if any.

The amount of the new financial incentive will correspond to the federal corporate income tax revenue gain from qualifying provincial capital tax reductions. The new financial incentive will be calculated as a specified rate times the estimated provincial revenue loss from capital tax reductions that meet the criteria for this financial incentive and that relate to the period from March 19, 2007 to January 1, 2011, inclusive. The specified rate will be equivalent to the estimated average effective federal corporate income tax rate applicable to these qualifying capital tax reductions.

The estimated provincial revenue loss from a qualifying capital tax reduction will be the difference between an estimate of the provincial capital tax revenue that would have been raised in a given fiscal year based on legislation in effect before March 19, 2007, and the actual provincial capital tax revenue raised in that fiscal year. In the case of a capital tax on financial institutions that is restructured into a minimum tax eligible for the financial incentive, the estimated revenue loss will be equal to the provincial capital tax revenue that would have been raised in a given fiscal year based on legislation in effect before March 19, 2007.

The incentive will be paid out annually, in respect of each full or partial fiscal year between March 19, 2007 and January 1, 2011, inclusive. An advance payment will be made on each March 31 beginning in 2008 and ending in 2011, if the province has enacted legislation before the payment date and provided sufficient information to estimate the provincial revenue loss of the qualifying capital tax reduction or restructuring prior to the preceding January 31. The final adjustment for a qualifying capital tax reduction in a given fiscal year will be made on the first March 31 following the release of the province's public accounts in respect of that fiscal year (except where those accounts are released less than 60 days before that date, in which case the final adjustment will be made on the next following March 31).

Trust T3 Information Returns

A number of taxpayers and tax professionals have expressed concern with the existing due-date for the issuance of Trust T3 information slips. The Government is working with the investment funds industry to develop a process that appropriately balances the desire of taxpayers for sufficient time to prepare their tax returns and the desire of commercial trusts (including income trusts) for sufficient time to compute their income and prepare their T3 information slips. It is expected that draft regulations to give effect to a more efficient process for 2007 T3 slips will be released in the near future.

Previously Announced Measures

Budget 2007 confirms the Government's intention to proceed with the following previously announced tax measures, as modified to take into account consultations and deliberations:

• Functional currency reporting referenced in Budget 2006;


• The Tax Fairness Plan announced on October 31, 2006;


• Enhancements to the Child Fitness Tax Credit for children with disabilities, announced on December 19, 2006;


• GST/HST exemption for midwifery services, announced on December 28, 2006;


• Improvements to the taxation of financial institutions, announced on December 28, 2006;


• Proposed improvements to the application of the GST/HST to the financial services sector, announced on January 26, 2007; and


• Tobacco manufacturers' surtax relief for tobacco processors, announced on February 2, 2007.

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¹ The treaty changes agreed by negotiators must still be accepted by the Canadian and United States governments, and must be legislatively endorsed according to the procedures in each country. In the case of Canada, this means the enactment of a statute that makes the revised treaty part of the laws of Canada.[Return]

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