Explanatory Notes Relating to the Income Tax Act and Other Legislation

These explanatory notes describe proposed amendments to the Income Tax Act and other legislation. These explanatory notes describe these proposed amendments, clause by clause, for the assistance of Members of Parliament, taxpayers and their professional advisors.

The Honourable Chrystia Freeland, P.C., M.P.
Deputy Prime Minister and Minister of Finance

These notes are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.

Part 1 – Amendments to the Income Tax Act and Other Legislation

Amendments to the Income Tax Act (the "Act" or "ITA")

Clause 2

Employment benefits

Section 6 of the Act sets out a number of rules in respect of benefits that are to be included in income from an office or employment of a taxpayer.

COVID-19 — automobile operating expense benefit

Paragraph 6(1)(k) provides a formula for determining the operating expense benefit of an employee where an automobile is provided to the employee, or a person related to the employee, by the employer, or a person related to the employer, and operating expenses are paid by the employer or a person related to the employer.

If such an automobile is used primarily in the course of the employee's office or employment, the employee can elect that the operating expense benefit be one-half of the standby charge for the automobile determined under subparagraph 6(1)(e)(i) less any reimbursements to the payor in respect of operating expenses. The employee must, however, inform the employer in writing by the end of a year of the employee's intention to have the benefit calculated in this manner for that year.

Where the employee is not eligible (or does not choose) for the benefit to be calculated in this manner, the amount of the benefit in respect of the operation of an automobile is determined by reference to the number of kilometres driven for personal use during the period in the year in which the automobile is made available by the employer or a person related to the employer.

New subsection 6(2.2) provides special rules that may apply to the automobile operating expense benefit formula for the 2020 and 2021 taxation years. These special rules deem the operating expense benefit to be equal to the lesser of one-half of the standby charge and the per-kilometre prescribed rate. For this to apply, an employer-provided automobile must have been used primarily in the performance of the duties of the taxpayer's office or employment during the period it was provided in 2019. The new subsection applies to automobiles that are provided by that employer in 2020 or 2021.

COVID-19 — reasonable standby charge

Subsection 6(2) provides the calculation of a reasonable standby charge which must be included in computing an employee's income where an employer-provided automobile is made available to the employee. The standby charge may be reduced where the employee's personal use of the employer-provided automobile is less than 1,667 kilometres per month and the distance travelled by the automobile is primarily in connection with or in the course of the office or employment.

Paragraph (a) of the description of A in the formula in subsection 6(2) effectively allows for a reduced reasonable standby charge if the conditions in its subparagraphs (i) and (ii) are met. For the condition in subparagraph (ii) to be met, the distance travelled by the automobile in the total days that it was available to the employee must be primarily in connection with or in the course of the employee's office or employment.

New subsection 6(2.3) provides special rules that may apply to the reasonable standby charge for the 2020 and 2021 taxation years. It provides that if the condition described above (in subparagraph (a)(ii) of the description of A in subsection 6(2)) was met in 2019, it will be deemed to be met in 2020 and 2021, provided the employer remains the same.

Clause 3

Employee stock options – definitions

Subsection 7(7) of the Act defines "qualifying person" and "security" for the purposes of section 7 and certain other provisions of the Act relating to agreements under which employees of a corporation or a mutual fund trust acquire rights to acquire securities of the employer (or a person with whom the employer does not deal at arm's length).

Subsection 7(7) is amended to have these definitions apply for the purposes of new subsection 110(0.1), new paragraph 110(1)(e) and new subsections 110(1.3) to (1.44) and (1.9).

For more information, see the commentary on those new provisions.

This amendment comes into force on July 1, 2021.

Clause 4

Zero-emission vehicles – application rules

Paragraph 13(7)(i) of the Act provides rules relating to the capital cost and proceeds of disposition of a taxpayer's depreciable property that is a "zero-emission passenger vehicle", as defined in subsection 248(1), the cost of which exceeds the prescribed amount.

Subparagraph 13(7)(i)(ii) provides that, on a disposition of the vehicle, the taxpayer's "proceeds of disposition" are reduced where the vehicle is disposed of to a person or partnership with which the taxpayer deals at arm's length. This reduction is effected by multiplying the proceeds of disposition otherwise determined by a fraction represented by the ratio of the capital cost of the vehicle to the taxpayer divided by the cost of the vehicle to the taxpayer.

Subparagraph 13(7)(i)(ii) is amended in two respects. First, clause (B) of the description of B in the formula is amended to refer to the amount determined for variable C. Second, the description of C itself is amended by introducing a formula that adjusts the taxpayer's cost of the vehicle for any payments or repayments of government assistance that may have been received or repaid by the taxpayer in respect of the vehicle.

These amendments apply in respect of dispositions made after July 29, 2019.

Clause 5

Deemed interest for sections 15 and 212.3 – acquisition of control

Subsection 17.1(2) of the Act provides 180 days of transitional relief from the application of the interest rules in subsection 17.1(1), in respect of a pertinent loan or indebtedness (as defined in subsection 212.3(11)), where a non-resident parent referred to in section 212.3 acquires control of a corporation resident in Canada (referred to as a "CRIC") that was not controlled by a non-resident corporation immediately before the acquisition of control.

Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of application of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, subsection 17.1(2) is amended to extend the transitional relief under that subsection to where a group of non-resident persons not dealing with each other at arm's length acquires control of the CRIC (and the other conditions in that subsection are satisfied).

For more information, see the commentary on paragraph 212.3(1)(b).

This amendment applies in respect of transactions or events that occur after March 18, 2019.

Clause 6

Change in use rules for multi-unit residential properties

Section 45 of the Act contains rules which apply in determining a capital gain or allowable capital loss of a property which has been used for more than one purpose. In general, section 45 provides for a deemed disposition and reacquisition of property for tax purposes where its use, or a portion of its use, is altered from personal use to income-earning or producing use, or vice versa. Section 45 also provides that a taxpayer can elect that there be no deemed disposition on a change in use under certain circumstances.

Election where change in use

Subsection 45(2) provides that, for the purposes of subdivision c of Division B of Part I of the Act and section 13, where there is a change in the use of an entire property of a taxpayer from a non-income producing to an income producing purpose, the taxpayer may file an election to deem there to be no such change (if there were no election, there would be a deemed disposition and reacquisition for tax purposes under subparagraph 45(1)(a)(i) and paragraph 13(7)(b)). The election is required to be filed with the taxpayer's return of income under Part I for the year that the change in use occurs.

The election is not available where there is an increase in the proportion of the use of a property that is for the purpose of gaining or producing income. Therefore, in those circumstances, there will be a deemed disposition with respect to the increase in the proportion of the property used for income producing purposes under subparagraphs 45(1)(c)(ii) and 13(7)(d)(i).

Subsection 45(2) is amended to provide that, for the purposes of subdivision c and section 13, a taxpayer may also file an election when there is an increase in the proportion of the use of a property for gaining or producing income, to deem there to be no change in use.

New paragraph 45(2)(a) provides that a taxpayer may file an election in respect of a property where there is a change in the entire use of a property of the taxpayer from a non-income producing purpose to an income producing purpose, to deem there to be no change in use.

New paragraph 45(2)(b) provides that a taxpayer may file an election where subparagraph 45(1)(c)(ii) or 13(7)(d)(i) would otherwise apply to the property. The election deems there to be no change in use where there is an increase in the proportion of the use of the property made by the taxpayer for the purposes of gaining or producing income.

New paragraph 45(2)(c) provides that a taxpayer may rescind the election in a return of income under Part I for a subsequent year. Under subparagraph 45(2)(c)(i), where the taxpayer rescinds, in the subsequent year, an election initially made in respect of a change in use of a property from non-income producing to income producing, the change in use will be deemed to commence on the first day of that subsequent year. Under subparagraph 45(2)(c)(ii), where the taxpayer rescinds, in the subsequent year, an election initially made in respect of an increase in the proportion of the use of the property made by the taxpayer for the purposes of gaining or producing income, the change in use will be deemed to commence on the first day of that subsequent year.

Election concerning principal residence

When an individual acquires property for use in a business or for rental purposes and at a later time occupies the property as a principal residence, paragraph 45(1)(a) treats the individual as having disposed of the property at its fair market value at that time. The deemed disposition may result in recognition of a capital gain. Subsection 45(3) allows an individual to elect that this deemed disposition not apply on the change in use of a residential property.

Subsection 45(3) is amended to allow an individual to also elect that the deemed disposition not apply where the change in use involves only a part of a property.

The amendments to section 45 apply in respect of changes in the use of property that occur after March 18, 2019.

Clause 7

Amounts to be included in income for year

Subsection 56(1) of the Act describes certain amounts that are required to be included in computing the income of a taxpayer for a taxation year.

Annuity payments – advanced life deferred annuities

Paragraph 56(1)(d) requires certain amounts received in respect of annuity payments to be included in the income of a taxpayer for a taxation year, with limited exceptions.

Consequential on the introduction of advanced life deferred annuities (ALDAs) under new section 146.5, paragraph 56(1)(d) is amended to complement the income inclusion (and exclusion) provisions of new subsection 146.5(3). If a death benefit is paid out of an ALDA to a beneficiary not described in paragraph 146.5(3)(a), then paragraph 146.5(3)(b) includes the death benefit amount in the income of the deceased annuitant and not the recipient beneficiary. Consequently, new subparagraph 56(1)(d)(iv) ensures that a payment received by a taxpayer out of an ALDA is exempt from being included in income under paragraph 56(1)(d) if the amount is not required to be included in the taxpayer's income under subsection 146.5(3).

For more information, see the commentary on new subsection 146.5(3), which applies to death benefits paid under an advanced life deferred annuity.

This amendment comes into force on January 1, 2020.

Tax treatment of COVID-19 benefit amounts

In response to the COVID-19 pandemic, certain benefits have been received by eligible recipients in the 2020 and 2021 taxation years under the Canada Emergency Response Benefit Act, Part VIII.4 of the Employment Insurance Act, the Canada Emergency Student Benefit Act and the Canada Recovery Benefits Act.

New subparagraph 56(1)(r)(iv.1) is added to clarify that the benefits received under these four Acts, or under similar provincial or territorial programs, are to be included in the recipient's income.

In order to ensure there is no overlap between these rules, subparagraph 56(1)(r)(iv) is amended to carve-out any amounts included under new subparagraph 56(1)(r)(iv.1).

These amendments come into force on January 1, 2020.

Advanced life deferred annuities

New paragraph 56(1)(z.5) provides for the inclusion in computing a taxpayer's income for a taxation year of amounts required to be included in income under new section 146.5.

For more information, see the commentary on new section 146.5, which applies to advanced life deferred annuities.

This amendment comes into force on January 1, 2020.

Clause 8

Deductions in computing income

Section 60 of the Act provides for various deductions in computing income.

Transfer of refund of premiums under RRSP

In circumstances where an individual has received (or is deemed to have received) certain taxable lump-sum amounts from a deceased individual's registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or registered pension plan (RPP), paragraph 60(l) allows the individual to claim an offsetting deduction for qualifying rollovers made by or on behalf of the taxpayer. An offsetting deduction is available if all or a portion of the taxable death benefit is transferred to certain qualifying arrangements (such as an RRSP or a RRIF) of a taxpayer (in this commentary referred to as a "qualifying taxpayer") who was either (i) a spouse or common-law partner of the deceased annuitant, or (ii) a child or grandchild of the deceased annuitant and was financially dependent on the deceased annuitant by reason of mental or physical infirmity.

Paragraph 60(l) is amended, consequential on the introduction of advanced life deferred annuities in new section 146.5. Where a qualifying taxpayer receives a death benefit from an advanced life deferred annuity that is included in the taxpayer's income under subsection 146.5(3), new clause 60(l)(v)(A.2) will permit the taxpayer to claim an offsetting deduction for the portion of the benefit that the taxpayer contributes to a qualifying vehicle. As such, the qualifying taxpayer can effect a tax-deferred rollover for all or a portion of death benefit proceeds from an advanced life deferred annuity.

For more information on the rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

This amendment comes into force on January 1, 2020.

COVID-19 – other benefit repayments

New paragraph 60(v.3) provides a special rule for the repayment of certain COVID-19 benefit amounts that are included in income under any of clauses (A) to (D) of new subparagraph 56(1)(r)(iv.1).

Benefit repayment amounts are ordinarily deductible in the year of repayment, under paragraph 60(n). However, new subparagraph 60(v.3) allows taxpayers to deduct such repaid amounts in the year in which they were included in income, provided the amounts are repaid before 2023.

The deduction under paragraph 60(v.3) is not available in respect of an amount deducted under paragraph 60(n). As such, taxpayers are given the option of deducting the repayment amount in the year of receipt or the year of payment, but not both. However, where benefits received under section 8 of the Canada Emergency Response Benefit Act are repaid, there is no option to deduct those amounts in the year of repayment. Taxpayers must deduct those repayment amounts in accordance with the rules in paragraph 60(v.2).

This amendment comes into force on January 1, 2020.

Clause 9

Registered disability savings plans – cessation of eligibility for the disability tax credit

"specified RDSP payment"

A "specified RDSP payment" is an amount paid to an RDSP – under which an eligible individual (as defined in subsection 146.4(1)) is the beneficiary – that complies with the conditions set out in paragraphs 146.4(4)(f) to (h) and that has been designated as a specified RDSP payment by the eligible individual and the RDSP holder (as defined in subsection 146.4(1)) at the time of the payment. Unlike other RDSP contributions, for which no tax deduction is available, the amount of a specified RDSP payment will be included in the recipient's income on withdrawal from the RDSP.

Paragraph 146.4(4)(f) prohibits RDSP contributions in a year in respect of which the beneficiary is not a "DTC-eligible individual" (as defined in subsection 146.4(1)), except for a contribution that is a "specified RDSP payment".

The definition "specified RDSP payment" is amended by adding paragraph (e) to permit a tax-deferred rollover of proceeds from a registered plan of a deceased individual to the RDSP of an eligible beneficiary before the end of the fifth taxation year throughout which the beneficiary is DTC-ineligible.

For more information, see the commentary on section 146.4.

This amendment comes into force on March 19, 2019.

Clause 10

Child care expenses

Section 63 of the Act provides rules for the deductibility of child care expenses in computing a taxpayer's income.

Eligible child – basic personal amount

Subsection 63(3) contains the definition "eligible child" for the purpose of the child care expense deduction. One of the criteria used in determining the eligibility of a child for this deduction is whether the child's income exceeds the basic personal amount, below which income can be earned on a tax-free basis.

Consequential on the introduction of the new basic personal amount calculation in new subsection 118(1.1), paragraph (b) of this definition is amended so that its income test refers to the unreduced maximum basic personal amount, which is the amount determined for F in new subsection 118(1.1).

For more information on the computation of the new basic personal amount, see the commentary on new subsection 118(1.1).

This amendment applies to the 2020 and subsequent taxation years.

COVID-19 – child care expenses

Section 63 provides a deduction for certain child care expenses that are incurred for the purpose of enabling a taxpayer to perform certain activities, including earning employment or business income, pursuing education and performing research (the "purpose test"). One of the limiting factors for this deduction is based in part on the amount of a taxpayer's "earned income" for the year, as defined in subsection 63(3) (the "income limitation").

Subsection 63(3.1) is introduced to provide a special reading of certain rules in the definitions "child care expense" and "earned income" in subsection 63(3), for the 2020 and 2021 taxation years.

Paragraph 63(3.1)(a) relates to the purpose test. It provides that, for the 2020 and 2021 taxation years, the definition "child care expense" in subsection 63(3) is to be read without reference to paragraph (a) of that definition if at any time in the taxation year the taxpayer was entitled to an amount referred to in subparagraph 56(1)(a)(iv) or (vii) or paragraph 56(1)(r), in respect of the year. These provisions include in a taxpayer's income certain financial assistance payments. As such, taxpayers entitled to receive such payments for the relevant year would not have to meet the purpose test for that year.

Paragraph 63(3.1)(b) relates to the income limitation. It provides that, for the 2020 and 2021 taxation years, the definition "earned income" in subsection 63(3) is to also take into account amounts included in a taxpayer's income for the relevant year under subparagraph 56(1)(a)(iv) or (vii), which relate to employment insurance and Quebec parental insurance, respectively. As such, taxpayers whose income for the relevant year includes such benefits would have a higher income limitation threshold for that year.

This amendment comes into force on January 1, 2020.

Clause 11

COVID-19 – disability supports deduction

Section 64 of theAct provides a deduction for certain disability supports expenses that are incurred for the purpose of enabling a taxpayer to perform certain activities, including earning employment or business income, pursuing education, and performing research (the "purpose test"). One of the limiting factors for the disability supports deduction is based in part on the amount of a taxpayer's income for the year from certain sources (the "income limitation").

Section 64.01 is introduced to provide a special reading of certain rules relating section 64's purpose test and income limitation, for the 2020 and 2021 taxation years.

Paragraph 64.01(a) relates to the purpose test. It provides that, for the 2020 and 2021 taxation years, the description of A in paragraph 64(a) is to be read without reference to its subparagraph (i) if at any time in the taxation year the taxpayer was entitled to an amount referred to in subparagraph 56(1)(a)(iv) or (vii) or paragraph 56(1)(r), in respect of the year. These provisions include in a taxpayer's income certain financial assistance payments. As such, taxpayers entitled to receive such payments for the relevant year would not have to meet the purpose test for that year.

Paragraph 64.01(b) relates to the income limitation. Some of the sources of income that are taken into account in determining the income limitation are described in clause 64(b)(i)(A). Paragraph 64.01(b) provides that, for the 2020 and 2021 taxation years, clause 64(b)(i)(A) is to also take into account amounts included in a taxpayer's income for the relevant year under subparagraph 56(1)(a)(iv) or (vii), which relate to employment insurance and Quebec parental insurance, respectively. As such, taxpayers whose income for the relevant year includes such benefits would have a higher income limitation threshold for that year.

This amendment comes into force on January 1, 2020.

Clause 12

Resource expenditures

Section 66 of the Act provides for the deduction of certain expenses related to natural resource exploitation and clean energy generation.

COVID-19 – time extension to 36 months (flow-through shares)

Subsections 66(12.6) and (12.62) permit a principal-business corporation to renounce Canadian exploration expenses (CEE) and Canadian development expenses (CDE), such that the holders of its flow-through shares can instead claim those expenses. One of the conditions of eligibility for flow-through treatment is that the CEE or CDE must be incurred in the period that begins on the day on which the relevant flow-through share agreement is entered into and ends 24 months after the end of the month that includes that day.

In response to the COVID-19 pandemic, subsection 66(12.6001) is introduced for the purpose of extending the 24-month period provided in subsections 66(12.6) and (12.62) by 12 months. The extension applies to flow-through share agreements entered into after February 2018 and before 2021.

COVID-19 – agreements in 2019 or 2020 (flow-through shares)

Subsection 66(12.73) provides that, where a corporation renounces CEE or CDE under subsections 66(12.6), (12.601) or (12.62) in excess of the amount that the corporation was entitled to renounce, the corporation must reduce the amount so renounced and file a statement with the Minister of National Revenue indicating the adjustments made. This requirement also applies to renunciations made under the "look-back rule" in subsection 66(12.66) in respect of expenditures that are expected to be incurred after the renunciation is made. Subsection 66(12.66) permits a corporation to renounce to its flow-through shareholders certain types of CEE that it has incurred, or plans to incur, in a particular calendar year with effect as of the end of the preceding calendar year.

Consequential on the introduction of COVID-19-related time extensions for incurring relevant expenditures, new subsection 66(12.731) ensures that those extended periods are taken into account for the reporting requirements under subsection 66(12.73).

Short taxation years (accelerated investment incentive)

Subsection 66(13.1) limits the amount of certain resource expenses that a taxpayer may deduct in computing income for a taxation year where the amount is based on a percentage of the unclaimed balance and the taxation year is less than 51 weeks. In these cases, the amount that may be deducted by the taxpayer cannot exceed that portion of the amount otherwise determined that the number of days in the taxation year is of 365.

Subsection 66(13.1) is amended by adding references to paragraphs 66.2(2)(d) and 66.4(2)(c). This ensures that this short taxation year rule applies in determining the amount of a taxpayer's accelerated Canadian development expense and accelerated Canadian oil and gas property expense.

This amendment applies to taxation years that end after July 30, 2019.

Clause 13

Amalgamations

Subsection 87(2) of the Act provides a number of application rules for corporations that have been formed on an amalgamation of one or more predecessor corporations. A number of amendments are being made to provide for deemed continuation rules for certain specific purposes.

Canada recovery hiring program – deemed continuance

Paragraph 87(2)(g.6) provides that, for the purposes of the Canada Emergency Wage Subsidy (in subsection 125.7(2)) and the Canada Emergency Rent Subsidy (in subsection 125.7(2.1)), a new corporation formed on the amalgamation of two predecessor corporations is deemed to be the same corporation as, and a continuation of, each predecessor corporation.

Paragraph 87(2)(g.6) is amended so that the rule also applies to the new Canada Recovery Hiring Program credit under new subsection 125.7(2.2).

Automobile expense benefits – deemed continuance

New paragraph 87(2)(g.7) allows new corporations formed on an amalgamation to be treated as the same employer as its predecessor corporations for the purposes of new subsections 6(2.2) and (2.3), which provide relief measures in connection with COVID-19 in respect of the use by an employee of an employer-provided automobile for the 2020 and 2021 taxation years.

This amendment comes into force on January 1, 2020.

Continuing corporation – employee stock options

Subsection 87(2) is amended consequential on the introduction of new paragraph 110(1)(e) that provides a deduction to an employer in respect of certain employee stock option benefits, and a formula under new subsection 110(1.31) that determines the proportion of securities under a stock option agreement that are deemed to be non-qualified securities.

New paragraph 87(2)(j.97) deems a corporation formed on an amalgamation to be a continuation of each predecessor corporation for the purposes of the employer deduction. As result, if an employer is entitled to a future deduction under subsection 110(1)(e) (i.e., when employees will acquire non-qualified securities under a stock option agreement), the corporate amalgamation will not cause the employer to become ineligible for the deduction.

For the purposes of subsection 110(1.31) and its determination of the non-qualified securities under a stock option agreement, note that variable D takes into consideration securities under agreements entered into "before the relevant time" with a particular qualifying person or related qualifying person. As a consequence of new paragraph 87(2)(j.97), subsection 110(1.31) will take into account the securities underlying stock option agreements entered into (after June 2021) by the predecessor corporation(s) of the particular qualifying person and its related corporations.

This amendment comes into force on July 1, 2021.

Clause 14

Preferred beneficiary election for trusts – basic personal amount

Section 108 of the Act sets out certain definitions and rules concerning the taxation of trusts and their beneficiaries.

Subsection 108(1) contains the definition "preferred beneficiary". Under the preferred beneficiary election in subsection 104(14), certain amounts of income otherwise taxable at the trust level can be allocated to a preferred beneficiary. In general, individuals must qualify for the disability tax credit to be a preferred beneficiary. However, adults not qualifying for the disability tax credit who are nevertheless dependent on another person because of mental or physical infirmity can qualify as preferred beneficiaries if their income (determined before allocations under the preferred beneficiary election) is below the basic personal amount.

Consequential on the introduction of the new basic personal amount calculation in new subsection 118(1.1), clause (a)(ii)(B) in this definition is amended to refer to the amount determined for F in subsection 118(1.1) (i.e., the maximum basic personal amount).

For more information on the computation of the new basic personal amount, see the commentary on new subsection 118(1.1).

This amendment applies to the 2020 and subsequent taxation years.

Clause 15

Employee stock options – deductions in computing taxable income

Section 110 of the Act provides for a number of deductions in computing taxable income. Section 110 is being amended in a number of ways to implement new measures for the treatment of deductions in respect of employee stock options for both employees and employers.

Definitions

New subsection 110(0.1) contains three defined terms that are used in section 110 in the context of non-qualified securities under employee stock option agreements. For further information, see the commentary on new paragraph 110(1)(e) and new subsections 110(1.3) to (1.44) and (1.9).

"consolidated financial statements"

The definition "consolidated financial statements" has the same meaning as in subsection 233.8(1).

"specified person"

The definition "specified person" is relevant to the new rules relating to non-qualified securities (i.e., non-qualified for a paragraph 110(1)(d) deduction) and the new corporate deduction under paragraph 110(1)(e).

A specified person at any time is defined as a qualifying person (defined in subsection 7(7) as a corporation or mutual fund trust) that is not a Canadian-controlled private corporation (CCPC – as defined in subsection 125(7)) and that meets either of the following conditions:

• it is a member of a group that annually prepares consolidated financial statements and the total consolidated revenue of the group exceeded $500 million in the last consolidated statements presented to the shareholders (or unitholders) of the ultimate parent company of the group before that time; or
• it is not a member of a group that annually prepares consolidated financial statements and it has gross revenue exceeding $500 million in whichever of the following fiscal periods is applicable:
• the fiscal period that ended immediately before that time, if financial statements for that period had been presented to shareholders or unitholders before that time;
• the second-to-last fiscal period that ended before the relevant time, if shareholders or unitholders were presented with financial statements for that period but not for the period immediately before the relevant time; or
• the fiscal period that ended immediately before that time, if financial statements for neither of the two prior fiscal periods had been presented to shareholders or unitholders (based on gross revenues that would have been reflected on financial statements for that fiscal period had they been prepared in accordance with generally accepted accounting principles).

For example, assume that a corporation has a fiscal year end of December 31 and that it is a party to a stock option agreement entered into in 2022. If the agreement is entered into on June 1, 2022, after the December 31, 2021 financial statements have been presented to the shareholders, the corporation is a specified person if the gross revenues reported on those statements exceed $500 million (conversely, it is not a specified person if the gross revenues are less than $500 million). If the stock option agreement is entered into on February 1, 2022, before the 2021 financial statements have been prepared and presented to shareholders, the corporation is a specified person if the gross revenues reported on the financial statements for the year ended December 31, 2020 exceed $500 million. If financial statements for neither fiscal year 2020 nor 2021 have been presented to shareholders, then the test of specified person status would be based on gross revenues for 2021, as if financial statements as at December 31, 2021 had been prepared in accordance with generally accepted accounting principles.

If a qualifying person is a member of a group that annually prepares consolidated financial statements – whether a domestic group or a group controlled by a foreign parent (e.g., the parent company of a multinational enterprise) – the test of specified person status is based on the last consolidated financial statements (i.e., before the time the stock option agreement is entered into) that were presented to the shareholders (or unitholders) of the ultimate parent entity (as defined in subsection 233.8(1)). If the total consolidated group revenue reflected in those financial statements exceeds $500 million, then the qualifying person is a specified person.

Note that although a CCPC cannot itself be a specified person, a qualifying person that does not deal at arm's length with the CCPC might be a specified person and might therefore cause securities under stock options granted by a CCPC to be non-qualified securities. In this regard, refer to the commentary on new subsection 110(1.3).

"vesting year"

The definition "vesting year" is relevant for the purposes of the $200,000 limit in new subsection 110(1.31), which deems certain securities under a stock option agreement to be non-qualified securities. The term "vesting year" applies with respect to a security that a qualifying person has agreed to sell or issue to an individual under an agreement. It is generally the first calendar year in which the individual may exercise the right to acquire the security. Where the agreement specifies the calendar year in which the individual's right to acquire the security first becomes exercisable, that calendar year will be the vesting year. Some agreements provide for an acceleration of the exercise right in the event of certain events, the timing of which is not reasonably foreseeable at the time the agreement is entered into, such as the death of the individual. These accelerated vesting dates are not to be taken into consideration for the purpose of determining the agreement's vesting year.

Where the agreement does not specify the calendar year in which the individual's right to acquire the security first becomes exercisable, the vesting year(s) of the underlying securities will be determined on a pro rata basis over a period that ends at the earlier of 60 months after the date the agreement is entered into and the last day at which employees can acquire securities under the agreement. For example, assume that a stock option agreement is in force from July 1, 2022 to June 30, 2029 (i.e., a seven-year period) and that the agreement did not specify the year(s) in which rights to acquire securities may first be exercised. In that case, 10% of the securities would have a vesting year of 2022, 20% would have a vesting year of 2023, 20% would have a vesting year of 2024, 20% would have a vesting year of 2025, 20% would have a vesting year of 2026, and 10% would have a vesting year of 2027.

The vesting year of a security to be acquired under an agreement to sell or issue securities to an individual is determined at the time the qualifying person agrees to sell or issue the security. As a consequence, the vesting year in respect of a security may differ from the year in which the security is acquired by the individual.

These amendments come into force on July 1, 2021.

Employee options

Paragraph 110(1)(d) provides a deduction in computing the taxable income of a taxpayer if certain conditions are met. The deduction is equal to ½ of the amount of the benefit deemed by subsection 7(1) to have been received by the taxpayer in respect of a security under an employee stock option agreement.

Paragraph 110(1)(d) is amended to not allow this deduction in respect of an amount of any benefit that is deemed to have been received by the taxpayer in respect of a non-qualified security.

For information about the tax rules applicable to non-qualified securities, see the commentary on new paragraph 110(1)(e) and new subsections 110(1.3) to (1.44) and (1.9).

This amendment comes into force on July 1, 2021.

Employer deduction – non-qualified securities

New paragraph 110(1)(e) provides a deduction in computing the taxable income of an employer that is qualifying person (a corporation or mutual fund trust) if certain conditions are met. The deduction is equal to the amount of the benefit deemed by subsection 7(1) to have been received by an individual (i.e., an employee) in respect of a non-qualified security under an employee stock option agreement.

In order for the employer to claim the deduction:

• it must have been an employer of the individual at the time the agreement was entered into (or must be a successor employer);
• the amount may not be claimed as a deduction by another qualifying person;
• if the security had not been a non-qualified security, the amount of the benefit would have been deductible by the individual under subsection 110(1)(d); and
• the notification requirements under subsection 110(1.9) must be met in respect of the non-qualified security.

In the case where a non-resident employee acquires non-qualified securities, the employer may claim the 110(1)(e) deduction in a year only to the extent that the benefit earned by the employee under subsection 7(1) was included in the employee's taxable income earned in Canada for the year.

In the case where the stock option agreement is entered into by a qualifying person that is not the individual's employer (but where the qualifying person does not deal at arm's length with the employer), paragraph 110(1)(e) provides the deduction to the employer of the individual and not to the seller or issuer of the securities.

It should be noted that corporate partners may be eligible to claim the deduction in some circumstances involving employees of partnerships. Accordingly, to the extent that a benefit from a non-qualified security is included in a partnership employee's taxable income (in accordance with section 7), a corporate partner may be eligible to claim a 110(1)(e) deduction in computing its taxable income, depending on the particular facts.

For more information about the conditions under which a security is deemed to be a non-qualified security, see the commentary on new subsections 110(1.3) to (1.44) and (1.9). Also see the commentary on paragraph 87(2)(j.92) regarding a successor employer to an employer that entered into a stock option agreement with employees.

This amendment applies in respect of agreements to sell or issue securities entered into after June 2021.

Election by particular qualifying person

Subsection 110(1.1) allows a taxpayer who disposed of their rights (a "cash out") under an employee stock option agreement to claim the deduction under paragraph 110(1)(d) if the taxpayer's employer elects to forgo (and for any person with which it does not deal at arm's length to forgo) any deduction otherwise available to it in respect of a payment to, or for the benefit of, the taxpayer for the disposition of the rights. However, there is an exception from this prohibition for "designated amounts", as discussed under subsection 110(1.2) below.

As a result of the amendment to paragraph 110(1)(d) (discussed above) and the introduction of new subsections 110(1.3) to (1.44), certain restrictions are placed on an employer's ability to file an election under subsection 110(1.1).

Because these new rules apply on a right-by-right basis, two consequential amendments are made to subsection 110(1.1) to replace references to "all rights" with singular references to a right.

For more information about the conditions under which a security is deemed to be a non-qualified security, see the commentary on new subsections 110(1.3) to (1.44) and (1.9).

This amendment applies in respect of agreements to sell or issue securities entered into after June 2021.

Designated amount

Subsection 110(1.2) defines a "designated amount" for the purposes of subsection 110(1.1). These amounts are excepted from the prohibition in subsection 110(1.1) in respect of employer deductions for cash-outs of employee stock options.

Subsection 110(1.2) is amended to add references to new subsection 110(1.44), which is similar in nature to subsection 110(1.1), in certain respects.

For more information, see the commentary on new subsections 110(1.3) to (1.44).

This amendment applies in respect of agreements to sell or issue securities entered into after June 2021.

Determination of non-qualified securities

New subsection 110(1.3) provides the conditions that must be met for subsection 110(1.31) to apply. In general terms, subsection 110(1.31) deems securities to be non-qualified securities if they are to be sold or issued under an employee stock option agreement with a qualifying person and an annual $200,000 vesting limit is exceeded. Whether a security is a non-qualified security is relevant primarily for the purposes of the employee deduction in paragraph 110(1)(d) and the employer deduction in new paragraph 110(1)(e).

Subsection 110(1.3) provides that subsection 110(1.31) applies to a taxpayer (employee) in respect of a stock option agreement if the following conditions are met:

• a particular qualifying person (as defined in subsection 7(7)) agrees to sell or issue its own securities or the securities of a non-arm's length qualifying person to the taxpayer;

• at the time the agreement is entered into, the taxpayer is an employee of the particular qualifying person (or of another non-arm's length qualifying person); and

• any of the following qualifying persons is a specified person (as defined in subsection 110(0.1)) at the time the agreement is entered into:
  1. the particular qualifying person that entered into the agreement with the taxpayer;
  2. the qualifying person whose securities will be sold or issued under the agreement; or
  3. a qualifying person who is an employer of the taxpayer (either the particular qualifying person or another non-arm's length qualifying person).

Note that, even if the issuer of the stock option agreement is not itself a specified person, the test in subsection 110(1.31) for non-qualified security status will apply if the securities to be issued or sold are those of a specified person or if the agreement is entered into with employees of a specified person. This could include cases where a CCPC enters into a stock option agreement and does not deal at arm's length with a specified person.

This amendment applies in respect of agreements to sell or issue securities that are entered into after June 2021.

Annual vesting limit

New subsection 110(1.31) applies to securities to be sold or issued by a qualifying person under a stock option agreement if the conditions in subsection 110(1.3) are met in respect of that agreement.

This subsection provides a formula for calculating the proportion of securities under a stock option agreement that are deemed to be non-qualified securities. The deduction for employees under paragraph 110(1)(d) is not available in respect of non-qualified securities while the deduction for employers under paragraph 110(1)(e) is available only in respect of non-qualified securities.

The $200,000 limit provided by the formula applies in respect of each vesting year. As such, if a portion of the securities to be sold or issued under an agreement have a particular vesting year and others have another vesting year, the formula is applied separately in respect of each of those years.

The proportion of securities to be sold or issued under an agreement that are deemed to be non-qualified securities is expressed by the formula A/B. Variable B is the total fair market value (determined at the time the agreement is entered into) of the securities to be sold or issued under the agreement for the particular vesting year that is being tested. The description of A contains another formula, which incorporates the $200,000 limit. If the amount to be determined for the formula "C + D – $200,000" would otherwise be negative, section 257 deems that amount to be nil, which results in none of the securities being deemed to be non-qualified securities.

As with variable B, the description of C is based on the total fair market value (at the time the agreement is entered into) of securities to be sold or issued under the agreement for a particular vesting year.

Variable D is the lesser of $200,000 and the total fair market value of securities to be sold or issued in respect of other agreements (whether entered into previously or contemporaneously) for that vesting year. Thus, this variable brings into consideration the relevant amounts for securities to be sold or issued under other agreements that have the same vesting year, with some exceptions, being: securities designated under subsection 110(1.4), "old securities" within the meaning of subsection 7(1.4), securities where the right to acquire those securities is an "old right" within the meaning of subsection 110(1.7), and securities in respect of which the right to acquire them is cancelled or has expired, before that time. In this regard, rights are not considered to be cancelled or to have expired where an amount is deductible under paragraph 110(1)(d) in respect of the underlying security (for example, where an employee receives a cash-out payment in exchange for the employee disposing of their rights to the securities).

Whereas new subsections 110(1.3) and (1.31) (among others) apply only to stock option agreements entered into after June 2021, the reference in paragraph (b) of Variable D to an "amount determined for C in respect of … agreements entered into before the relevant time" does not include stock option agreements that were entered into before July 1, 2021.

Mckayla is an employee of Xco, which is a specified person. In 2022, Xco agrees to grant her 70,000 employee stock options to acquire 70,000 shares of Xco, each with a strike price of $2 (the fair market value of the underlying securities at the time the options are granted). The first year Mckayla will be able to acquire those securities is in the 2024 calendar year.

The proportion of those securities that are deemed to be non-qualified securities is:

A = C + D – $200,000

C = $140,000 (i.e., 70,000 x $2)

D = is the lesser of

A = 0 (i.e., $140,000 + 0 – $200,000)

As a result, none of the securities in respect of which options are granted in 2022 are non-qualified securities.

In 2023, Xco agrees to grant Mckayla another 50,000 options to acquire 50,000 shares of Xco with a strike price of $2 (the fair market value of the underlying securities at the time the options are granted) with a vesting year of 2024.

The proportion of those securities that are deemed to be non-qualified securities is:

A = C + D – $200,000

C = $100,000 (i.e., 50,000 x $2)

D = is the lesser

(ii) $140,000 (i.e., the amount for C for the previous options with the same vesting year)

A = $40,000 (i.e., $100,000 + $140,000 – $200,000)

As a result, 20,000 (i.e., 50,000 x ($40,000/$100,000)) of the 50,000 securities in respect of which options are granted in 2023 are non-qualified securities.

This amendment applies in respect of agreements to sell or issue securities that are entered into after June 2021.

Non-qualified security designation

New subsection 110(1.4) allows a qualifying person that enters into a stock option agreement with a taxpayer to designate one or more securities under the agreement to be non-qualified securities for the purposes of section 110, notwithstanding that the securities might otherwise not be non-qualified securities after applying subsection 110(1.31). Such a designation would enable an employer to claim a paragraph 110(1)(e) deduction from its taxable income and deny employees from claiming a deduction under subsection 110(1)(d).

In the case where an employee disposes of their right to acquire a security in exchange for a cash-out payment, a designation under subsection 110(1.4) by the qualifying person prohibits that person from filing an election under subsection 110(1.1) to shift the deduction back to the employee.

For more information, see the commentary on new paragraph 110(1)(e) and new subsections 110(1.3), (1.31) and (1.9).

This amendment applies in respect of agreements to sell or issue securities that are entered into after June 2021.

Ordering of acquisition of securities

New subsection 110(1.41) provides an ordering rule for the purpose of determining whether a security acquired on the exercise of an employee stock option is a non-qualified security.

This subsection is relevant where an employee exercises a right to acquire some, but not all, of the securities that the employee could acquire under one or more stock option agreements and the securities acquired could be either non-qualified securities or securities that are not non-qualified securities (in this note referred to as "qualified securities"). This may be the case where, for example, the employee has a number of identical options or one agreement that could result in the acquisition of qualified securities or non-qualified securities.

Subsection 110(4.1) provides that the taxpayer is considered to acquire qualified securities first, before acquiring any non-qualified securities.

Andrew is an employee of a Yco, a specified person. In 2022, Yco grants Andrew options to acquire 300,000 shares with a strike price of $2 per share (the fair market value of the underlying securities at the time the options are granted) and a vesting year of 2023. Yco does not agree to sell Andrew any other securities with that vesting year.

Under subsection 110(1.31), 200,000 of those shares will be non-qualified securities and 100,000 of the shares will be qualified securities.

If Andrew chooses to exercise his right to acquire 150,000 of those 300,000 shares in 2023, 100,000 of those shares could be qualified securities. Thus, he is considered to exercise options to acquire the 100,000 qualified securities first, with the remaining 50,000 shares being non-qualified securities.

This amendment applies in respect of agreements to sell or issue securities that are entered into after June 2021.

Ordering of simultaneous agreements – subsection 110(1.31)

For the purposes of paragraph (b) in variable D in subsection 110(1.31), where two or more stock option agreements are entered into at the same time, subsection 110(1.42) permits the qualifying person that entered into the agreements to designate the order in which the agreements are considered to be entered into. This ensures that, under the formula in subsection 110(1.31) to determine non-qualified security status, one stock option agreement does not preclude another from granting securities that can be eligible for the deduction under paragraph 110(1)(d).

For more information, see the commentary on new subsections 110(1.3) and (1.31).

This amendment applies in respect of agreements to sell or issue securities that are entered into after June 2021.

Application of subsection 110(1.44) – conditions

New subsection 110(1.43) sets out the conditions for the application of subsection 110(1.44).

In general terms, the three conditions set out in paragraphs 110(1.43)(a) to (c) in respect of a taxpayer's (employee's) right to acquire a security are:

• the taxpayer's right to acquire securities under the agreement was subject to the test under subsection 110(1.31) to determine whether any securities were non-qualified securities;
• after the application of subsection 110(1.31), the particular security is not a non-qualified security and the qualifying person that entered into the agreement with the taxpayer did not designate the security (pursuant to subsection 110(1.4)) to be a non-qualified security; and
• the taxpayer subsequently receives a cash-out payment that extinguishes the taxpayer's right to acquire the security.

This amendment applies in respect of agreements to sell or issue securities that are entered into after June 2021.

Cash-out – securities not designated as non-qualified

New subsection 110(1.44) effects two outcomes with respect to a taxpayer's (employee's) right to acquire a security under a stock option agreement where the conditions in subsection 110(1.43) are met.

First, no qualifying person (a corporation or mutual fund trust) is entitled to a deduction in computing its income in respect of a cash-out payment to the employee in exchange for the employee's disposition of the right to acquire the security, other than a deduction for a "designated amount" in subsection 110(1.2).

Second, the employee may claim a 110(1)(d) deduction (if a stock option benefit is earned and is taxable under subsection 7(1)), notwithstanding that the employee did not acquire the security.

As a result, if a security is not a non-qualified security after the application of subsections 110(1.31) and (1.4), a deduction is only available for the individual taxpayer (employee). Furthermore, an employer cannot claim the 110(1)(e) deduction from taxable income, as the securities are not non-qualified securities. The outcome (a deduction for the employee) is intended to match that which would follow from an employer filing an election under subsection 110(1.1) at the time of the cash-out payment.

This amendment applies in respect of agreements to sell or issue securities that are entered into after June 2021.

Notification – non-qualified security

New subsection 110(1.9) provides notification obligations in respect of agreements to sell or issue non-qualified securities by a qualifying person.

If a security is deemed to be a non-qualified security under either subsection 110(1.31) or (1.4), the employer must notify the employee in writing that the security is a non-qualified security no later than 30 days after the day the agreement is entered into. Furthermore, the employer must notify the Minister of National Revenue in prescribed form that the security is a non-qualified security on or before the filing-due date for the taxation year of the qualifying person (which may be a person other than the employer) that includes the day on which the agreement is entered into.

Subparagraph 110(1)(e)(vi) provides that an employer must comply with this subsection in respect of a security in order to be eligible for the deduction under paragraph 110(1)(e) in respect of the security.

This amendment applies in respect of agreements to sell or issue securities entered into after June 2021.

Clause 16

Losses

Section 111 of the Act provides various rules in respect of the deductibility of losses in computing the taxable income of a taxpayer.

Employee life and health trusts – non-capital losses

Subsection 111(7.4) permits a three-year carry-forward and a three-year carry-back period for non-capital losses of an employee life and health trust.

Subsection 111(7.4) is amended to extend the allowable carry-forward period to seven years.

This amendment comes into force on February 27, 2018.

Non-capital losses – employee stock options

111(8) "non-capital loss"

Subsection 111(8) sets out definitions that apply for the purposes of section 111, which contains rules relating to loss carryovers. The definition "non-capital loss" in this subsection applies for the purposes of the Act because of subsection 248(1).

Consequential on the introduction of paragraph 110(1)(e), which provides a deduction to an employer in respect of certain employee stock options, paragraph (b) of the description of E in the definition "non-capital loss" in subsection 111(8) is amended to include amounts deducted by a taxpayer under paragraph 110(1)(e).

For more information, see the commentary on new paragraph 110(1)(e).

This amendment comes into force on July 1, 2021.

Clause 17

Taxation of non-residents

Subsection 115(1) of the Act determines the taxable income earned in Canada on which a non-resident person is subject to taxation under Part I of the Act.

Taxation of non-resident COVID-19 benefit recipients

New subparagraph 115(1)(a)(iii.22) provides that benefit amounts required to be included in a taxpayer's income under new subparagraph 56(1)(r)(iv.1) (relating to certain COVID-19 benefit programs) are included in computing the taxable income earned in Canada of a non-resident recipient of such benefits. This new rule is intended to ensure that individuals who reside in Canada for the purposes of these COVID-19 benefits but are considered non-resident persons for income tax purposes are taxable on these benefits in a manner generally similar to employment and business income earned in Canada by non-resident persons.

This amendment comes into force on January 1, 2020.

Employee stock options

Paragraph 115(1)(d) allows certain deductions under subsections 110(1), 100.1(1) and 111(1) to be taken into account in determining the taxable income earned in Canada of a non-resident.

Paragraph 115(1)(d) is amended to allow a deduction under new paragraph 110(1)(e) to also be taken into account in determining such taxable income.

For more information, see the commentary on new paragraph 110(1)(e).

This amendment comes into force on July 1, 2021.

Clause 18

Indexation of amounts – basic personal amount and Canada workers benefit

Subsection 117.1(1) of the Act provides for the indexing of various amounts in the Act, based on annual increases to the Consumer Price Index.

Subsection 117.1(1) is being reformulated by setting out its adjustment mechanism in subsection 117.1(1) and the provisions in respect of which the adjustments apply in new subsection 117.1(2). This reformulation is not intended to change the meaning of the rule but rather is for ease of readability and to facilitate future amendments. These rules generally apply to the 2021 and subsequent taxation years.

New subsection 117.1(2) includes new references (in its paragraphs (f) and (g)) to subsection 118(1.1) in respect of the indexation of the revised rules for the basic personal amount. For more information, see the commentary on new subsection 118(1.1). However, indexation of the amount referred to in paragraph 117.1(2)(g) will not commence until the 2024 taxation year.

Subsection 117.1(2) also includes references (in its paragraphs (p) to (r)) to the new thresholds, and the new secondary earner exemption feature, in respect of the Canada Workers Benefit. For more information, see the commentary on section 122.7. Indexation of these amounts will not commence until the 2022 taxation year.

Clause 19

Personal tax credits – increase to basic personal amount

Section 118 of the Act provides a number of tax credits for individuals. A number of amendments are being made in this regard.

Married or common-law partner status

Paragraph (a) of the description of B in the formula in subsection 118(1) provides a tax credit to individuals who are married or in a common-law partnership. Consequential on the introduction of the new basic personal amount calculation in subsection 118(1.1), subparagraphs (a)(i) and (ii) of the description of B in subsection 118(1) are amended to replace the references to $10,527 with references to the new basic personal amount.

For more information on the computation of the new basic personal amount, see the commentary on new subsection 118(1.1).

This amendment applies to the 2020 and subsequent taxation years.

Wholly dependent person

Paragraph (b) of the description of B in the formula in subsection 118(1) provides a tax credit to individuals who are single and have a wholly dependent relative. Consequential on the introduction of the new basic personal amount calculation in subsection 118(1.1), subparagraphs (b)(iii) and (iv) of the description of B in subsection 118(1) are amended to replace the references to $10,527 with references to the new basic personal amount.

For more information on the computation of the new basic personal amount, see the commentary on new subsection 118(1.1).

This amendment applies to the 2020 and subsequent taxation years.

Single status

Paragraph (c) the description of B in the formula in subsection 118(1) provides for a basic personal amount for individuals who are not entitled to a credit under paragraph (a) or (b) of the description of B in subsection 118(1). Consequential on the introduction of the new basic personal amount calculation in subsection 118(1.1), paragraph (c) of the description of B in subsection 118(1) is amended to replace the reference to $10,320 with a reference to the new basic personal amount.

For more information on the computation of the new basic personal amount, see the commentary on new subsection 118(1.1).

This amendment applies to the 2020 and subsequent taxation years.

Definition of basic personal amount

New subsection 118(1.1) provides for the calculation of an individual's basic personal amount. The calculation of the new basic personal amount is comprised of two basic elements. Element A is the existing basic personal amount ($12,298, the amount for 2020 as indexed for inflation). Element B is an additional amount that is gradually reduced for individuals with income in excess of the bottom of the fourth tax bracket.

More particularly, the additional amount for Element B is determined by the formula C – D x E. Element C is the maximum additional amount, which is expressed as the formula F – G (Element F is the maximum basic personal amount for any particular year and Element G is the minimum basic personal amount). The values for Element F are:

• for the 2020 taxation year, $13,229;
• for the 2021 taxation year, $13,808;
• for the 2022 taxation year, $14,398; and
• for the 2023 and subsequent taxation years, $15,000.

The amount of $15,000 is indexed for inflation for the 2024 and subsequent taxation years.
For more information, see the commentary on section 117.1.

The amount of the addition to the basic personal amount is reduced (represented by D x E in the formula C – D x E) for individuals with income in excess of the bottom of the fourth tax bracket ($150,473 in 2020) and eliminated for individuals with income equal to or in excess of the bottom of the top tax bracket ($214,368 in 2020).

Assume that an individual has income of $200,000 for the 2020 taxation year.

The individual's basic personal amount is determined by the formula A + B. Variable A is $12,298 for the 2020 taxation year. Variable B is determined by the formula C – D x E.

Variable C represents the maximum additional amount. It is determined by the formula F – G. Since F is $13,229 for 2020 (i.e., the maximum basic personal amount) and G is $12,298 (i.e., the minimum basic personal amount), the amount determined for C is $931.

D x E reduces the amount that can be added (by Element B) to the minimum basic personal amount, based on the income of the individual. The amount determined for D is the same as the amount determined for C (i.e., the maximum additional amount), which is $931. The amount determined for E depends on the income of the individual. If the individual's income for 2020 were less than the bottom of the fourth tax bracket ($150,473 in 2020), the amount determined for E would have been nil. If that were the case, D x E would also be nil and result in the individual being entitled to the maximum basic personal amount.

Since the individual's income exceeds the threshold for the bottom of the fourth tax bracket, paragraph (b) of the description of E will apply and E will be the lesser of 1 and the amount determined by the formula (H – I)/J. This formula represents the proportion of the individual's income that is between the bottom of the fourth tax bracket and the bottom of the fifth tax bracket.

The (H – I) portion of the formula represents the amount by which the individual's income for a year ($200,000) exceeds the bottom of the fourth tax bracket ($150,473 in 2020). Variable J represents the size of the fourth bracket and is determined by the formula K – L, where K is the bottom of the fifth tax bracket ($214,368 in 2020) and L is the bottom of the fourth tax bracket ($150,473 in 2020). J would therefore be $63,895 and the amount determined by the formula (H – I)/J would be ($200,000 - $150,473)/ $63,895 = 0.775. Since this is less than 1, it becomes the amount determined for E.

If the amount determined for E were 1 (i.e., because the individual had income equal to or greater than the bottom of the fifth bracket), then the formula C – D x E would be $931 - $931 x 1 = nil. In other words, where an individual has income equal to or greater than the bottom of the fifth bracket, they would have no amount added to the minimum basic personal amount (which is $12,298 in 2020).

Since the amount for E has been determined, the amount for B can be determined. The formula for B is C – D x E, which results in $931 – $931 x 0.775 = $209.

The individual's basic personal amount for 2020 (A + B) would therefore be $12,298 + $209 = $12,507.

This amendment applies to the 2020 and subsequent taxation years.

Pension income – advanced life deferred annuities

118(7) "pension income"

One of the credits provided under section 118 is the pension credit, which is set out in subsection 118(3). The pension credit is available to a taxpayer who is 65 years of age or older and is based on the taxpayer's "pension income", as defined in subsection 118(7). The definition "pension income" is also relevant for the pension income splitting rules in section 60.03.

Paragraph (a) of the definition is amended by adding new subparagraph (iii.3) to include in pension income any amounts included in the individual's income under new subsection 146.5(2). As a result, annuity payments from an advanced life deferred annuity made after the taxpayer has attained 65 years of age are eligible for the pension credit and for pension income splitting.

For more information on the rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

This amendment comes into force on January 1, 2020.

Clause 20

Digital news subscription tax credit

Section 118.02 of the Act provides a non-refundable 15% credit on amounts paid by individuals for eligible digital news subscriptions, up to an annual expense limit of $500.

Definitions

Subsection 118.02(1) provides definitions that apply for the purposes of section 118.02.

"digital news subscription"

A "digital news subscription" is an agreement entered into between an individual and a qualified Canadian journalism organization that entitles the individual to access content provided by the organization in digital form.

The definition is amended to remove the requirement that the organization must be primarily engaged in the production of original written news content. It is further amended to add a requirement that the content provided under the subscription must be primarily written news. For more information, see the commentary on the definition "qualified Canadian journalism organization"in subsection 248(1).

The definition is also amended to replace the requirement that the organization must not be engaged in a broadcasting undertaking with a requirement that the organization not hold a licence, as defined in subsection 2(1) of the Broadcasting Act.

These amendments come into force on January 1, 2020.

Ceasing to qualify

The digital news subscription tax credit is a non-refundable tax credit available in respect of qualifying subscription expenses. Subsection 241(3.4) allows the Minister of National Revenue to inform taxpayers which organizations and which subscriptions may be eligible in respect of this credit.

New subsection 118.02(4) provides a deeming rule for the calendar year in which a subscription ceases to be eligible for the credit. For the deeming rule to apply in respect of a subscription, the Minister must have previously informed taxpayers that the subscription qualified for the credit. Where this deeming rule applies, the cost of the subscription is deemed to be a qualified subscription expense until the end of the year to the same extent as before the subscription ceased to qualify.

For more information, see the commentary on subsection 241(3.4).

Notice to individuals

New subsection 118.02(5) provides an organization with the obligation to inform its subscribers when a subscription offered by it ceases to qualify for the digital news subscription tax credit.

Clause 21

Canada child benefit – shared-custody parents

"shared-custody parent"

The definition "shared-custody parent" in section 122.6 of the Act is amended in response to the Federal Court of Appeal decisions in Lavrinenko v. Canada (2019 FCA 51) and Morrissey v. Canada (2019 FCA 56). Paragraph (b) of the definition currently provides that, for an individual to qualify as a shared-custody parent in respect of a qualified dependant, the individual must be one of the two parents of the qualified dependant who reside with the qualified dependant on an equal or near equal basis. These decisions interpreted "near equal basis" as essentially meaning between 45% and 55% of the time.

The amendment replaces the "equal or near equal" test in paragraph (b) of the definition with two tests, set out in subparagraphs (i) and (ii). A taxpayer will only have to meet one of the two tests to satisfy paragraph (b), although in most cases a taxpayer meeting the condition in one subparagraph will meet the condition in the other.

The test in subparagraph (i) of the definition is intended to provide certainty for taxpayers. It provides that where each parent resides with the qualified dependant at least 40% of the time (i.e., they both so reside between 40% and 60% of the time), they may qualify as "shared-custody parents" for the purposes of section 122.6 (provided the other conditions in the definition are met). This test is intended to be consistent with the concept of shared custody in the Federal Child Support Guidelines.

The test in subparagraph (ii) of the definition is intended to provide additional flexibility in the determination of who qualifies as a shared-custody parent. It borrows from the previous "equal or near equal" test, but changes "equal or near equal basis" to "approximately equal basis". As a result, parents who reside with the qualified dependent less than 40% of the time but still on an "approximately equal basis" may also qualify as shared-custody parents. This would be the case where the proportion of time each parent spends residing with the qualified dependant represents a genuine approximation of equal time, given the particular circumstances of the parents.

While it is expected that the test in subparagraph (i) of the definition will apply in almost all cases where paragraph (b) is satisfied, the amendments allow for the possibility that, in certain circumstances, parents could be outside the 40% to 60% range (reflected in the Federal Child Support Guidelines) and still appropriately be considered to reside with the qualified dependant on an approximately equal basis. For example, the test in subparagraph (ii) may be met where the qualified dependant generally resides with each parent in the 40% to 60% range and the parents try to reside with the qualified dependant on as near an equal basis as possible but, due to illness or summer vacation schedules, the split is 38% to 62% in a particular month.

This amendment is intended to reflect the Canada Revenue Agency's administrative practice relating to the definition "shared-custody parent" prior to the recent decisions noted above.

This amendment comes into force on July 1, 2011.

Clause 22

Canada workers benefit

Section 122.7 of the Act provides the Canada Workers Benefit (CWB), a non-taxable refundable tax credit that is aimed at supplementing the earnings of low- and modest-income workers and improving work incentives. The CWB has two components: a base amount and a supplement for certain individuals with disabilities. Each of these components also has a phase-in threshold and rate and a phase-out threshold and rate. Changes are being made to most of these amounts and rates, as set out below.

Secondary earner exemption

New subsection 122.7(1.3) introduces a special rule (the "secondary earner exemption") under the CWB for individuals with an eligible spouse. The secondary earner exemption allows for an exclusion of up to $14,000 of the working income of the lower-income spouse in the computation of adjusted net income for a couple in the determination of the CWB phase-out (as discussed below). This should provide higher benefits under the CWB for many couples.

Deemed tax payment – basic amount and disability supplement

The basic CWB is set out in subsection 122.7(2) while the disability supplement is set out in subsection 122.7(3). Thresholds and rates for each of these components are being amended, as set out below.

For the basic CWB:

• the phase-in rate is being increased to 27% for both single individuals and families;
• the phase-out rate is being increased to 15%, for both single individuals and families; and
• the phase-out income threshold is being increased to $22,944 for single individuals and to $26,177 for families.

For the disability supplement:

• the phase-in rate is being increased to 27% for both single individuals and families;
• the phase-out rate is being increased to 15%, for both single individuals and most families;
• the phase-out rate is being increased to 7.5%, for couples that are both disabled; and
• the phase-out income threshold is being increased to $32,244 for single individuals and to $42,197 for families.

These amendments apply for the 2021 and subsequent taxation years, and the relevant amounts (including the secondary earner exemption amount) will be indexed for inflation starting in 2022. For more information on the indexation, refer to the commentary on section 117.1.

Clause 23

Tax credit for qualifying journalism organizations

Section 125.6 of the Act provides qualifying journalism organizations with a refundable tax credit for certain labour expenditures.

Subsection 125.6(1) provides definitions for the purposes of section 125.6.

"assistance"

The definition "assistance" is amended to provide that amounts from the Aid to Publishers component of the Canada Periodical Fund are not assistance for the purposes of the labour credit for qualifying journalism organizations.

"eligible newsroom employee"

The definition "eligible newsroom employees" requires that individuals must spend at least 75% of their time engaged in the production of news content to qualify as eligible newsroom employees for the purposes of the labour tax credit.

Consequential on the changes to the definition "qualifying journalism organization", the definition is amended to provide that individuals must spend at least 75% of their time engaged in the production of original written news content.

"qualifying journalism organization"

A qualifying journalism organization is a qualified Canadian journalism organization that is eligible for the labour tax credit.

The definition "qualifying journalism organization" is amended by replacing the requirement that an organization not be engaged in a "broadcasting undertaking" with a requirement that the organization not hold a "licence", as defined in subsection 2(1) of the Broadcasting Act.

The definition is also amended to remove the requirement that an organization be primarily engaged in the production of original written news content.

Currently, in order to qualify for the labour tax credit in the year, an organization cannot receive any amounts from the Aid to Publishers component of the Canada Periodical Fund. This restriction is removed from the definition. For more information, see the commentary on subsection 125.6(2).

"qualifying labour expenditure"

Qualifying labour expenditures are subject to an annual cap of $55,000, which is prorated for short taxation years. The definition is amended to also prorate the $55,000 cap for any organization that does not meet the conditions to be a qualifying journalism organization throughout the entire year.

Tax credit

Subsection 125.6(2) provides the refundable labour tax credit for journalism organizations. The amount of the credit is equal to 25% of the organization's total qualifying labour expenditures for the taxation year.

Subsection 125.6(2) is amended by reducing the amount of the tax credit available to a qualifying journalism organization in a taxation year by the amount of any funding received by the organization from the Aid to Publishers component of the Canada Periodical Fund in the taxation year. For more information, see the commentary on the definition "qualifying journalism organization" in subsection 125.6(1).

Partnership – tax credit

Under current rules, the labour tax credit in subsection 125.6(2) cannot be claimed by a partnership and the rules do not provide a mechanism for the credit to be allocated to members of a partnership.

New subsection 125.6(2.1) provides a labour tax credit for members of a qualifying journalism organization that is a partnership. The credit that would otherwise be claimed by a qualifying journalism organization under subsection 125.6(2) is effectively divided between the members of the partnership, other than other partnerships and specified members (as defined in subsection 248(1)) of the partnership. The total amount of the tax credit is allocated based on the relative specified proportions (as defined in subsection 248(1)) of each qualifying member of the partnership for each fiscal period of the partnership that ends in the taxpayer's taxation year.

Example: A partnership has four members, each of which shares equally in the profits (losses) of the partnership (i.e., their specified proportions are each ¼). One member of the partnership is a specified member and no member of the partnership is itself a partnership. The partnership has $10,000 in qualifying labour expenditures for the fiscal period and has received no amount from the Aid to Publishers component of the Canada Periodical Fund in that period.

To calculate the labour tax credit for a qualifying member of the partnership, the formula provided in subsection 125.6(2.1) is (0.25A – B)C/D.

A is $10,000, the qualifying labour expenditure of the partnership.

B is nil, as no amount from the Aid to Publishers component of the Canada Periodical Fund has been received in that period.

C is ¼, the specified proportion of the qualifying member.

D is ¾, the total specified proportions of all qualifying members.

0.25 x ($10,000) x (0.25) / (0.75) = $833

The labour tax credit of the partnership would be allocated equally between the three non-specified members of the partnership, with each partner receiving an amount of $833.

Partnership – application rule

New subsection 125.6(2.2) provides that, for the purposes of section 125.6, a taxpayer includes a partnership.

When assistance received

Subsection 125.6(3) provides that the amount of the refundable tax credit under subsection 125.6(2) for a taxation year is considered to be assistance received by the qualifying journalism organization from a government immediately before the end of the year (other than for the purpose of determining the refundable labour tax credit for the journalism organization itself).

Subsection 125.6(3) is amended to provide that if a member of a partnership receives an amount in respect of the journalism labour tax credit under subsection 125.6(2.1) for a year, the member is deemed to have received the amount as assistance from a government immediately before the end of the year.

The amendments to section 125.6 come into force on January 1, 2019.

Clause 24

Emergency business supports

Section 125.7 of the Act sets out the main rules for the Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) refundable tax credits. A number of amendments are being made to these rules and the new Canada Recovery Hiring Program (CRHP) credit is being added.

Definitions

Subsection 125.7(1) contains definitions that are relevant for the CEWS and the CERS. As a result of the introduction of the new refundable tax credit in subsection 125.7(2.2) (discussed below), many of these definitions will also be relevant for the CRHP.

"eligible employee"

The CEWS and the CRHP provide refundable tax credits in respect of eligible employees for certain qualifying periods.

Consequential on amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, the definition "eligible employee" is amended to update references to the first qualifying period to the fourth qualifying period.

"top-up percentage"

The rate of the CEWS provided in subsection 125.7(2) is comprised of two components: the base percentage and a top-up percentage, for employers with the most significant revenue declines.

The definition "top-up percentage" is amended to provide the relevant rates for the fifth qualifying period (the first qualifying period for which the top-up is available) to the twentieth qualifying period. For subsequent periods, the rate is set at nil, with the authority to prescribe a rate by regulation. Rates for periods that had been prescribed by regulation are incorporated into the definition for consistency and ease of reference.

"baseline remuneration"

Baseline remuneration represents an employee's pre-crisis earnings and is primarily relevant for certain purposes in the calculation of the wage subsidy in subsection 125.7(2). The baseline remuneration of an employee is essentially the average weekly remuneration paid to that employee during a reference period. Periods of seven or more consecutive days for which the employee was not remunerated are excluded. The default baseline remuneration period begins on January 1, 2020 and ends on March 15, 2020. An election can be made to use different baseline remuneration periods.

New subparagraph (iii.1) of the definition provides that the alternative baseline remuneration period for the fourteenth qualifying period to the seventeenth qualifying period is the period that begins on March 1, 2019 and ends on June 30, 2019, unless the eligible entity elects to use the period that begins on July 1, 2019 and ends on December 31, 2019.

New subparagraph (iii.2) of the definition provides that the alternative baseline remuneration period for the eighteenth qualifying period and any subsequent qualifying period is the period that begins on July 1, 2019 and ends on December 31, 2019.

"base percentage"

The rate of the CEWS provided in subsection 125.7(2) is comprised of two components: the base percentage and a top-up percentage.

Consequential on amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, the definition is amended to update references to various qualifying periods.

The definition is also amended to provide base percentages for up to the twentieth qualifying period. For subsequent periods, the rate is set at nil, with the authority to prescribe a rate by regulation.

"current reference period"

The revenues for an entity's current reference period are compared with its revenues for the relevant prior reference period for the purpose of determining its revenue decline, which is relevant to the CEWS, the CERS and the new CRHP.

Consequential on amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, the definition is amended to update references to various qualifying periods. Current reference periods for qualifying periods that had been prescribed by regulation are moved to the definition for consistency and ease of reference.

The definition is also amended to provide the current reference periods for the seventeenth qualifying period to the twenty-second qualifying period.

"prior reference period"

The revenues for an entity's current reference period are compared with its revenues for the relevant prior reference period for the purpose of determining its revenue decline, which is relevant to the CEWS, the CERS and the new CRHP.

Consequential on amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, the definition is amended to update references to various qualifying periods. Prior reference periods for qualifying periods that had been prescribed by regulation are moved to the definition for consistency and ease of reference.

The definition is also amended to provide the prior reference periods for the seventeenth qualifying period to the twenty-second qualifying period.

"public health restriction"

The definition "public health restriction" is relevant for the purpose of determining whether a qualifying renter is eligible for the Lockdown Support for a qualifying period (variable B in subsection 125.7(2.1)), in addition to its base rent subsidy (variable A in subsection 125.7(2.1)), for a qualifying period.

The owner of a qualifying property that rents the property to a non-arm's length person or partnership can currently qualify for the base rent subsidy in respect of certain expenses (described in paragraph (b) of the description of A in the definition "qualifying rent expense"), unless that person or partnership primarily uses the property to earn rental income. However, the Lockdown Support is currently available only if the activities of the entity applying for the rent subsidy are restricted.

Paragraphs (e) to (g) of the definition "public health restriction" are amended to allow a landlord to claim the Lockdown Support where it rents a qualifying property to a non-arm's length party (referred to as the "specified tenant") and the activities of that specified tenant are restricted, provided the other conditions for the Lockdown Support are met. The rental could be direct or indirect, through subleasing.

This amendment comes into force on September 27, 2020.

"qualifying entity"

The definition "qualifying entity" sets out the conditions that must be met for an eligible entity to qualify for the CEWS.

Consequential on amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, paragraph (c) of the definition is amended to update references to various qualifying periods.

"qualifying period"

An entity's CEWS, CERS and CRHP claims are each made in respect of a qualifying period.

The definition "qualifying period" is amended to provide chronologically defined names for each of the qualifying periods. It is also amended to incorporate qualifying periods previously prescribed by regulation, for consistency and ease of reference, and to add qualifying periods up to the twenty-second qualifying period, which ends on November 20, 2021. Finally, paragraph (d) of the definition is amended to provide that qualifying periods that end after November 2021 cannot be added by regulation. The restriction in paragraph (d) is maintained primarily to ensure that any provisions which cross reference paragraph (d) continue to operate as intended.

"rent subsidy percentage"

The "rent subsidy percentage" definition sets the rate for the base rent subsidy for a qualifying period.

Consequential on amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, the definition is amended to update references to various qualifying periods.

The definition is also amended to provide rent subsidy percentages for up to the twentieth qualifying period. For subsequent periods, the rate is set at nil, with the authority to prescribe a rate by regulation.

"rent top-up percentage"

The "rent top-up percentage" definition sets the rate for the Lockdown Support, which applies in addition to the base rent subsidy, for a qualifying period. To be eligible for the Lockdown Support for a qualifying period, an eligible entity must be subject to a public health restriction in respect of a qualifying property during the qualifying period. The rent top-up percentage is pro-rated based upon the proportion of a qualifying period that an eligible entity is subject to a public health restriction.

This amendment maintains the rent top-up percentage of 25% for the eighth qualifying period to the twentieth qualifying period, which may be changed by regulation. For subsequent periods, the rate is set at nil, with the authority to prescribe a rate by regulation.

"specified percentage"

The definition "specified percentage" is relevant for the first four qualifying periods, which required an eligible entity to have had their revenues drop by a specified percentage in order to qualify for the wage subsidy.

Consequential on amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, paragraphs (a) and (b) of the definition are amended to update references to various qualifying periods.

"top-up revenue reduction percentage"

An entity's top-up revenue reduction percentage measures the reduction in the entity's qualifying revenues for the purposes of the top-up to the wage subsidy.

Consequential on amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, the definition is amended to update references to various qualifying periods.

"executive compensation repayment amount"

This new definition is relevant to new subsection 125.7(14), which can require certain CEWS recipients to effectively repay CEWS amounts received in respect of active employees for the seventeenth and subsequent qualifying periods. The definition essentially provides the amount that an eligible entity is required to repay under that subsection.

Paragraph (a) of the definition provides that, in order for an eligible entity to have an executive compensation repayment amount, its shares must be listed or traded on a stock exchange or other public market or it must be controlled by a corporation the shares of which are listed or traded on a stock exchange or other public market.

For such eligible entities, paragraph (b) provides the calculation of the amount to be repaid. This is determined by the formula A x B. Variable B determines the total amount of CEWS that must be repaid under subsection 125.7(14) by a group of companies. The relevant group for these purposes is a publicly listed or traded company and each corporation controlled by that company. Variable A provides the percentage of that total amount that is to be repaid by each member of that group.

Variable A is primarily relevant to groups of companies. For a group, subparagraph (i) of the description of A allows the group to enter into an agreement as to how much of the total repayment of the group will be made by each member of the group. This agreement must be entered into by each member of the group that received the CEWS for the seventeenth qualifying period or a subsequent qualifying period. It must also be filed with the Minister of National Revenue in prescribed form. In order to ensure that the total repayment amount is assigned, the total percentages assigned under the agreement must total 100% and no member of the group can be assigned a greater repayment obligation than they received in CEWS payments for the relevant periods. Where no agreement is made (for example, where there is only one corporation in the group that claimed the CEWS), the default percentage for A is 100%.

Variable B is determined in subparagraph (ii) by the formula C – D, which represents the excess of the group's 2021 executive remuneration over the group's 2019 executive remuneration. For this purpose, the amount of executive remuneration is determined with respect to the calendar years and so, where a corporation reports its executive remuneration for an off-calendar year fiscal period, a proration of the fiscal periods that overlap the calendar year is required based on the number of days in the fiscal period that fall within the calendar year. Subparagraph (i) essentially caps the amount to be repaid at the total amount of CEWS received for active employees (i.e., employees who were not on leave with pay) for the relevant periods.

"executive remuneration"

This new definition is relevant to new subsection 125.7(14) and is used in subparagraph (ii) of the description of B in the definition "executive compensation repayment amount". It provides a measure of executive compensation based upon the amount determined for certain securities law purposes.

If a corporation files a Statement of Executive Compensation for Named Executive Officers pursuant to National Instrument 51-102 Continuous Disclosure, the total amount of compensation reported for the five Named Executive Officers (within the meaning of those rules) is used. This is generally the total compensation reported by that entity for its Chief Executive Officer, Chief Financial Officer and its three other most highly compensated executives. If the corporation has a similar disclosure obligation in another jurisdiction, the amount reflected in that disclosure is to be used. If the company is under no such disclosure obligation, the amount that would be reported if the company filed using the Canadian rules is to be used.

"qualifying recovery entity"

This new definition provides requirements for an eligible entity to qualify for the new CRHP refundable tax credit in subsection 125.7(2.2) for a qualifying period.

The first requirement, in paragraph (a) of the definition, is that the eligible entity must apply for the refundable tax credit no later than 180 days after the end of the relevant qualifying period. Furthermore, the eligible entity must be a qualifying entity for the purposes of the CEWS for that qualifying period. As a result, it must have had a payroll number with the Canada Revenue Agency on March 15, 2020 (or a qualifying payroll service provider) and the individual who has principal responsibility for the financial activities of the eligible entity must attest that the application is complete and accurate in all material respects.

While an applicant must be an eligible entity (as defined in subsection 125.7(1)) to be a qualifying recovery entity, paragraphs (c) and (d) of the definition provide additional requirements for corporations and partnerships, respectively. For a corporation to qualify, it must be a Canadian-controlled private corporation (including a cooperative corporation that would be a Canadian-controlled private corporation in the absence of subsection 136(1)). For a partnership to qualify, no more than half the interests in the partnership (determined by fair market value) can be held by any combination of non-eligible entities and corporations that don't meet the conditions for corporations.

The final condition of the definition is that the eligible entity must have greater than a minimum revenue reduction percentage for the relevant qualifying period. For the seventeenth qualifying period, the threshold is 0% and for each subsequent qualifying period the threshold is 10%. This aligns with the minimum revenue reduction percentages for the base percentage calculation in respect of the CEWS.

"recovery wage subsidy rate"

This new definition provides the relevant rates for each qualifying period for the new CRHP, as follows:

• 50% for the seventeenth qualifying period to the nineteenth qualifying period;
• 40% for the twentieth qualifying period;
• 30% for the twenty-first qualifying period; and
• 20% for the twenty-second qualifying period.

"total base period remuneration"

The new CRHP credit is based on the amount by which a qualifying recovery entity's total current period remuneration exceeds its total base period remuneration.

Total base period remuneration is based on the fourteenth qualifying period, which begins on March 14, 2021 and ends on April 10, 2021. It is the total amount of eligible remuneration paid to eligible employees for the four weeks in that period, subject to a limit for each employee per week of $1,129. Non-arm's length employees are also limited by their baseline remuneration, and the remuneration of employees who are on leave with pay for the week is excluded.

"total current period remuneration"

The new CRHP credit is based on the amount by which a qualifying recovery entity's total current period remuneration exceeds its total base period remuneration.

The amount determined for this definition is calculated in the same manner as for the definition "total base period remuneration", except that it is calculated for each of the seventeenth qualifying period to the twenty-second qualifying period (the periods for which the CRHP is available).

Canada recovery hiring program

New subsection 125.7(2.2) provides the CRHP refundable tax credit. This credit is computed as the recovery wage subsidy rate for the qualifying period (variable A) multiplied by the amount by which the qualifying recovery entity's total current period remuneration for the qualifying period (variable B) exceeds its total base period remuneration for the qualifying period (variable C).

Note that if an entity qualifies for both the CEWS, under subsection 125.7(2), and the CRHP for a qualifying period, new subsection 125.7(9.2) provides that the entity is entitled to the greater of the two amounts (but not both) for that qualifying period.

When assistance received

Government assistance is generally included in the recipient's income in the taxation year in which it is received. Subsection 125.7(3), which applies in respect of the CEWS and the CERS, is amended to provide that the CRHP credit is also considered assistance received from a government immediately before the end of the qualifying period to which the subsidy relates.

Asset sales

Subsections 125.7(4.1) and (4.2) provide a continuity rule that applies where business assets of a seller are purchased by an eligible entity, provided certain conditions are met. Where they apply, the eligible entity essentially steps into the shoes of the seller for the purposes of determining its eligibility for the CEWS. These provisions also apply to the CERS and the new CRHP.

Paragraph 125.7(4.2)(d) is amended to allow, provided the other conditions are met, a purchaser of assets to rely upon the vendor's pre-existing payroll or business number with the Canada Revenue Agency for the purpose of determining whether the purchaser meets the conditions to be a qualifying renter for the CERS.

This amendment comes into force on September 27, 2020.

Deemed overpayment

Paragraph 125.7(5)(a) provides that the amount of the deemed overpayment in respect of the CEWS and the CERS cannot exceed the amount claimed by the eligible entity in its application. Existing paragraph 125.7(5)(b) prevents entities that do not deal at arm's length with each other from exceeding the weekly salary cap per employee for the wage subsidy.

Paragraphs 125.7(5)(a) and (b) are amended so that they also apply in respect of the new CRHP.

Anti-avoidance – qualifying revenues

Subsection 125.7(6) is an anti-avoidance rule that is intended to prevent entities from taking actions to manipulate their qualifying revenues to increase the amount of the deemed overpayments under subsection 125.7(2) or (2.1). Where it applies, an eligible entity's revenue decline for the relevant qualifying period is effectively deemed to be nil, which results in the credit amount under subsection 125.7(2) or (2.1), as the case may be, being nil.

Consequential on amendments to the definition "qualifying period" that provide chronologically defined names for each of the qualifying periods, subparagraph 125.7(6)(b)(ii) is amended to update references to the fifth and subsequent qualifying periods.

Anti-avoidance – recovery wage subsidy

New subsection 125.7(6.1) is an anti-avoidance rule that is intended to prevent an entity from manipulating its total base period remuneration or total current period remuneration in order to obtain a larger CRHP credit under new subsection 125.7(2.2). Where it applies, it deems the eligible entity's total base period remuneration and total current period remuneration to be equal, which results in the credit amount under subsection 125.7(2.2) being nil.

Partnerships

Subsection 125.7(7) deems partnerships to be taxpayers for various purposes connected with the CEWS and the CERS, which allows partnerships to access those subsidies.

Paragraphs 125.7(7)(a) and (b) are amended so that they also apply in respect of the new CRHP.

Prescribed amounts

Subsection 125.7(8) allows various parameters relevant to the CEWS and the CERS to be changed by regulation. Paragraph 125.7(8)(a) allows the percentages and factors in definition "base percentage" in subsection 125.7(1), which provides the base CEWS rate, to be changed by regulation. Paragraph 125.7(8)(b) allows the percentages and factors in paragraph (a) of the definition "rent subsidy percentage" in subsection 125.7(1), which provides the base CERS rate, to be changed by regulation.

Paragraph 125.7(8)(a) is amended to add references to the additional qualifying periods that have been added to the definition "base percentage". Paragraph 125.7(8)(b) is amended to add a reference to new paragraph (a.1) of the definition "rent subsidy percentage". Finally, paragraph 125.7(8)(b.1) is added, which allows the percentages in the definition "recovery wage subsidy rate" to be changed by regulation. These set the rates for the new CRHP.

Special case

Subsection 125.7(9) provides a deeming rule that allows an eligible entity to use the greater of its revenue decline for the current qualifying period and the previous qualifying period for the purposes of determining its entitlement to the CEWS, the CERS and the new CRHP.

New subsection 125.7(9.1) provides that, for the eleventh qualifying period (which begins on December 20, 2020 and ends on January 16, 2021), the immediately preceding qualifying period is deemed to be the ninth qualifying period (which begins on October 25, 2020 and ends on November 21, 2020). This provides greater flexibility in determining an entity's revenue decline for the eleventh qualifying period because both it and the tenth qualifying period use December-over-December as their default reference periods in computing revenue declines.

Greater of wage and recovery subsidies

New subsection 125.7(9.2) provides that, for a qualifying period, an entity is entitled to the greater of the amount of its CRHP credit (determined under subsection 125.7(2.2)) for that qualifying period and its CEWS credit (determined under subsection 125.7(2)) for that qualifying period.

Executive compensation

New subsection 125.7(14) effectively requires an amount of CEWS received in respect of active (i.e., not on leave with pay) employees for the seventeenth and subsequent qualifying periods to be repaid, based on an eligible entity's executive compensation repayment amount. This is effected by deeming all or a portion of the amount of a CEWS payment received on a particular date to be an amount that was refunded to the eligible entity in excess of the amount to which the eligible entity was entitled. Subsection 160.1(1) would then deem that amount to have became payable to the Receiver General on that particular date. The portion of any such CEWS payment that is deemed to be an excess refund is determined by the formula A – B.

Variable A is the total amount required to be repaid by the eligible entity (i.e., its executive compensation repayment amount). Variable B is the total of all deemed excess refunds for later CEWS payments. This effectively provides an ordering rule, where later CEWS payments are required to be repaid before earlier payments.

Foreign currency – executive remuneration

Paragraph 261(2)(b) provides that if a particular amount that is relevant in computing Canadian tax results is expressed in a foreign currency, the particular amount is – subject to certain listed provisions – to be converted to Canadian currency using the relevant spot rate for the day on which the particular amount arose. Paragraph 261(5)(c) is a similar rule for taxpayers that report their tax results in a functional currency.

New subsection 125.7(15) provides that, for the purposes of paragraphs 261(2)(b) and 261(5)(c), amounts referred to in the definition "executive remuneration" in subsection 125.7(1) are deemed to arise on the last day of the eligible entity's fiscal period. As such, where the compensation amounts referred to in that definition are expressed in a currency other than the currency used by the taxpayer to report its tax results under the Act, those amounts are to be converted using the relevant spot rate (as defined in subsection 261(1)) for that day.

Clause 25

Foreign tax credits – employee stock options

Section 126 of the Act provides rules for the deductibility of certain foreign taxes in computing tax payable of a taxpayer.

Subsection 126(1) provides a tax credit in respect of foreign "non-business-income tax". The various calculations take into the amount by which the taxpayer's foreign-sourced income for the year exceeds the deductions listed in subclause 126(1)(b)(ii)(A)(III), including deductions under paragraphs 110(1)(d) to (d.3), (f) and (g).

Consequential on the introduction of new paragraph 110(1)(e), which provides a deduction to an employer in respect of certain employee stock options, subclause 126(1)(b)(ii)(A)(III) is amended to refer to "paragraphs 110(1)(d) to (g)".

Subsection 126(2.1), which relates to foreign "business-income tax", is similarly amended.

For more information, see the commentary on new paragraph 110(1)(e).

These amendments come into force on July 1, 2021.

Clause 26

Corporate immigration – foreign affiliate dumping

Paragraph 128.1(1)(c.3) of the Act is intended to apply to prevent certain tax planning arrangements involving corporate immigrations that could otherwise be used as substitutes for transactions that are addressed by the foreign affiliate dumping rules in section 212.3. That paragraph applies where a particular non-resident corporation controls another non-resident corporation that immigrates to Canada and the immigrating corporation owns shares of the capital stock of a non-resident corporation that becomes a foreign affiliate of the immigrating corporation, either immediately after the immigration or as part of a transaction or event or series of transactions or events that includes the immigration.

Paragraph 128.1(1)(c.3) can deem the immigrating corporation to pay a dividend to the particular non-resident corporation or cause a reduction of the paid-up capital (PUC) of the shares of the immigrating corporation.

Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of application of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, paragraph 128.1(1)(c.3) is amended to similarly extend its scope of application to where the immigrating corporation is controlled by a group of non-resident persons not dealing with each other at arm's length. Consequential changes are also made to the defined terms in paragraph 128.1(1)(c.3). For more information, see the commentary on paragraph 212.3(1)(b).

Also consequential on the amendments to paragraph 212.3(1)(b), a new formula is added to subparagraph 128.1(1)(c.3)(ii), for the purpose of calculating the amount of any dividend deemed to be paid by the immigrating corporation to a parent. The effect of this change is that, where the immigrating corporation is controlled by a group of parents, the amount that would have been the amount of the deemed dividend, had a single non-resident person controlled the immigrating corporation, is allocated between the group members based on the relative fair market values of the shares of the immigrating corporation that are held, directly or indirectly, by them. These amendments are analogous to the concurrent changes to paragraph 212.3(2)(a). For more information, see the commentary on paragraph 212.3(2)(a).

These amendments apply in respect of transactions or events that occur after March 18, 2019.

Clause 27

Mutual fund trusts – allocation to redeemers

Section 132 of the Act contains special rules relating to the taxation of mutual fund trusts. New subsection 132(5.3) introduces rules that recognize the investment fund industry's use of the allocation to redeemers methodology. This new subsection is intended to prevent the deferral or avoidance of tax that is associated with the misuse of this methodology.

The preamble to subsection 132(5.3) provides the conditions for the application of the new rules. In particular, subsection 132(5.3) applies to a trust that is a mutual fund trust throughout a taxation year and that paid or made payable to a beneficiary, on a redemption of a beneficiary's unit, an amount that is not included in the beneficiary's proceeds from the redemption of that unit. (In these notes, such amount is referred to as the "allocated amount".) The allocated amount represents the portion of what would otherwise be the beneficiary's redemption proceeds that is treated as a distribution to the beneficiary out of the mutual fund trust's ordinary income or capital gains. The allocated amount does not include ordinary course distributions (e.g., distributions made to all unitholders periodically).

Where the provision applies, paragraph 132(5.3)(a) denies the mutual fund trust a deduction in computing its income for a taxation year for the portion of the allocated amount that is paid out of the mutual fund trust's income, other than taxable capital gains.

Where the provision applies, paragraph 132(5.3)(b) denies the mutual fund trust a deduction in computing its income for a taxation year for the portion of the allocated amount that is paid out of the mutual fund trust's taxable capital gains that exceeds one half of the gain that would have been realized by the redeeming beneficiary but for the allocated amount. This denied amount is determined by the formula: A - 1/2(B + C - D).

Variable A is the portion of the allocated amount that would be, without reference to subsection 104(6), an amount paid out of the mutual fund trust's taxable capital gains.

Variable B is the beneficiary's proceeds from the disposition of the unit on redemption.

Variable C is the allocated amount.

Variable D is the amount determined by the trustee to be the beneficiary's cost amount of that unit, using reasonable efforts to obtain the information required to determine the cost amount.

Generally, it is expected that a mutual fund trust will keep records of initial subscription prices paid when units are acquired and will have accurate information as to transactions involving the units to which the mutual fund trust is a party, that may affect the cost amount of the units. In the absence of such information, it is expected that the mutual fund trust would make reasonable efforts to obtain this information, for example through inquiries to third parties or through a search of relevant records.

It would not be expected that a mutual fund trust would need to make inquires regarding external factors (i.e., events that did not involve the mutual fund trust or transactions to which the mutual fund trust was not a party) unless the mutual fund trust has reason to believe that such external factors exist and could affect the cost amount of the units.

Example – capital gains overallocation

Mutual Fund Trust disposed of investments during a taxation year and realized a capital gain of $90. A Beneficiary who held units on capital account redeemed its units during the same taxation year when the net asset value of the units was $100 and the adjusted cost base to Beneficiary of the redeemed units was $50. Beneficiary is entitled to receive $100 with respect to the redemption.

Using the "allocation to redeemers methodology", Mutual Fund Trust treats the $100 payable to Beneficiary as being a distribution to Beneficiary of Mutual Fund Trust's entire capital gain of $90 and a payment of redemption proceeds of $10. This capital gain allocated to Beneficiary exceeds the capital gain of $50 that would otherwise have been realized by Beneficiary on the redemption of its units. Mutual Fund Trust claims a deduction under subsection 104(6) in computing its income in respect of the entire taxable capital gain of $45 realized by it. This deduction of $45 exceeds the deduction of $25 (i.e., ½ x $50) that Mutual Fund Trust would have claimed had it limited the allocated amount to the capital gain of $50 that would otherwise have been realized by Beneficiary.

New paragraph 132(5.3)(a) would not be applicable in this example, because no portion of the allocated amount was treated as being paid out of the income of Mutual Fund Trust.

However, new paragraph 132(5.3)(b) would apply to limit the deduction by Mutual Fund Trust under subsection 104(6). The amount denied would be the portion of the allocated amount determined by the formula:

A – ½ (B +C – D) = $45 – ½ ($10 + $90 – $50) = $20

A is the portion of the allocated amount of $90 that would be, without reference to subsection 104(6), an amount paid out of the taxable capital gains of the trust: $45

B is Beneficiary's proceeds from the disposition of the unit on the redemption: $100 - $90 = $10

C is the allocated amount: $90

D is the Beneficiary's cost amount of that unit: $50

In sum, new subsection 132(5.3) would deny a deduction in respect of $20 of the allocated amount. This represents the difference between the claimed deduction of $45 and the deduction of $25 (which Mutual Fund Trust would have claimed had it limited the allocated amount to the capital gain of $50 that would otherwise have been realized by Beneficiary).

These amendments apply to taxation years that begin after March 18, 2019. However, paragraph 132(5.3)(b) does not apply to a taxation year of a mutual fund trust that begins before December 16, 2021, if, in that taxation year, units of the trust are listed on a designated stock exchange in Canada and are in continuous distribution (i.e., an exchange traded fund).

Clause 28

Agricultural cooperatives – tax-deferred patronage dividends

Section 135.1 of the Act provides a tax deferral in respect of patronage payments received by eligible members of eligible agricultural cooperatives in the form of shares of the cooperative. Absent the tax deferral, such payments would be taxable to the member in the year of receipt. The income inclusion is generally deferred until the disposition (or deemed disposition) of the share by the eligible member. The cooperative is also able to avoid the withholding obligation that would otherwise apply on such payments. However, the cooperative would have a withholding obligation if and when the shares are redeemed.

"tax deferred cooperative share"

The definition "tax deferred cooperative share" in subsection 135.1(1) sets out the type of shares that are eligible for beneficial treatment under section 135.1. Under the current version of the definition, such shares must be issued after 2005 and before 2021.

The definition is amended to apply in respect of eligible shares issued after 2005 and before 2026.

Clause 29

Expenditure limitations – employee stock options

Section 143.3 of the Act reduces, if applicable, the amount of a taxpayer's expenditure by certain amounts for the purposes of computing the taxpayer's income, taxable income and tax payable or an amount considered to have been paid on account of the taxpayer's tax payable.

Subsection 143.3(5) provides a number of rules that are intended to provide greater certainty. New paragraph 143.3(5)(e) is added consequential on the introduction of new paragraph 110(1)(e), which provides a deduction to an employer in respect of certain employee stock options.

Paragraph 143.3(5)(e) provides that section 143.3 does not apply to prohibit the deduction of an amount under paragraph 110(1)(e).

For more information, see the commentary on new paragraph 110(1)(e).

This amendment comes into force on July 1, 2021.

Clause 30

Employee life and health trusts

Section 144.1 sets outs the rules applicable to employee life and health trusts (ELHT). In general terms, these trusts are established by an employer in order to provide health and welfare benefits to its employees.

Definition of "designated employee benefit"

The definition "designated employee benefit" in subsection 144.1(1) is amended to add two more categories of employee benefits that may be offered through an ELHT.

The first category (new paragraph (d) of the definition) includes any benefit from counselling services described in subparagraph 6(1)(a)(iv). It includes counselling services in respect of the mental or physical health, or the re-employment or retirement, of a taxpayer described in paragraph 144.1(2)(d). These benefits are not included in computing the income of the taxpayer.

The second category (new paragraph (e) of the definition) includes a benefit that is not a "death benefit" as defined in subsection 248(1) but that would be such a death benefit if the amounts determined for paragraphs (a) and (b) of that definition were nil. Essentially, it means that the first $10,000 of benefit provided on the death of a taxpayer in respect of that taxpayer's employment qualifies as a designated employee benefit. This amount is not included in computing the income of the taxpayer.

Employee life and health trust

Subsection 144.1(2) sets out the conditions that must govern a trust throughout a taxation year in order for the trust to qualify as an ELHT. Subsection 144.1(2) is amended in a number of respects.

Paragraph 144.1(2)(a) currently requires that the trust's purposes be limited to the provision of "designated employee benefits", which includes related activities such as managing investments, administering payments and transferring property to another ELHT.

The condition in paragraph 144.1(2)(a) is amended such that the purpose of an ELHT must be to provide benefits the total cost of which is all or substantially all attributable to designated employee benefits. This means that an ELHT can offer benefits that are not designated employee benefits as long as all or substantially all of the total cost of the benefits provided are designated employee benefits. Paragraph 144.1(3)(b) restricts benefits that are not designated employee benefits to benefits that may provide a deduction (for contributions) in computing the income of the employer.

Paragraph 144.1(2)(c) requires that a trust governing an ELHT be resident in Canada. It is amended to permit the trust to be resident outside of Canada if it meets the conditions set out in clauses (A) to (C) in new subparagraph 144.1(2)(c)(ii). Specifically, if an ELHT provides designated employee benefits to both residents and non-residents of Canada and at least one participating employer is resident outside of Canada, then the trust may be resident in a country in which a participating employer resides.

Paragraph 144.1(2)(d) requires that the trust have no beneficiaries other than persons each of whom is an employee of a participating employer, an employee's spouse or common law partner, a member of the employee's household who is related to the employee, another ELHT or Her Majesty in right of Canada or a province. This paragraph is amended in two places to include a reference to former employers, which is intended to ensure that where an employer no longer contributes to the trust and the employer previously participated in the plan, retirees and former employees of that employer can still receive designated employee benefits.

Paragraph 144.1(2)(e) requires that an ELHT contain at least one class of beneficiaries that represents at least 25% of all of the beneficiaries of the trust who are employees of a participating employer. In addition, at least 75% of the members of the class must not be key employees of the employer. This paragraph is amended such that the 25% and 75% tests no longer apply to each participating employer but now apply globally across all participating employers. For example, an ELHT will not be offside if one or more employers has key employees that exceed 25% of its employees provided that the total number of key employees (of all employers) under the ELHT does not exceed 25% of the total employees (of all employers) under the ELHT.

Paragraph 144.1(2)(e) is also amended to relax the restrictions that apply to the participation of key employees. The current condition that at least 75% of the beneficiaries of a class must not be key employees does not apply (i.e., key employees may exceed 25% of the members) if key employees deal at arm's length with their employer and the contributions made on their behalf are determined in connection with a collective bargaining agreement.

Alternatively, if an ELHT restricts the annual cost of private health services plan benefits payable to each key employee and to each family member to no more than $2,500 (prorated if the key employee did not work full-time throughout the year), then there are no limits on the number of key employees (including non-arm's length employees) that may participate under the ELHT. The $2,500 is a limit for each family member but it is applied on a group basis. As such, any unused portion of the maximum $2,500 limit provided in respect of the key employee or any particular member of their family may be used to provide additional benefits to any other eligible member of the family in respect of which the $2,500 limit is exceeded.

Paragraph 144.1(2)(h) requires that the trust not make a loan to, or an investment in, a participating employer (or a person not dealing at arm's length with a participating employer). Where this occurs, the trust will be precluded from any deductions provided for under subsection 104(6) for any taxation year in which the condition is not met. If a trustee inadvertently acquires an investment in an entity that did not deal at arm's length with a participating employer, the tax consequences could be inequitable where the value of the prohibited investment represents a small fraction of the total trust capital.

Accordingly, paragraph 144.1(2)(h) is repealed and new Part XI.5 is added to the Act to impose a tax on the value of a prohibited investment acquired by an ELHT. For more information, see the commentary on new Part XI.5 (section 207.9).

Paragraph 144.1(2)(i) requires that employer representatives not constitute a majority of the trustees of the trust (or otherwise control it). This paragraph is amended to eliminate the reference to employer representatives and to provide instead that trustees who do not deal at arm's length with one or more participating employer must not constitute a majority of the trustees of the ELHT.

Breach of terms, etc.

Paragraph 144.1(3)(a) stipulates that an ELHT that, in a taxation year, breaches the terms required to govern the trust under subsection 144.1(2) may not deduct any amount pursuant to subsection 104(6) for that taxation year.

Paragraph 144.1(3)(a) is amended to provide an exception to the condition that an ELHT must be operated at all times throughout a year in accordance with the requirements in subsection 144.1(2). Specifically, an ELHT will not be considered to have breached its terms where the trustees could not reasonably have known about the participation of beneficiaries other than those described in subparagraph 144.1(2)(d)(i) or (ii) (i.e., beneficiaries other than employees or their family members).

For example, in the case of a plan with many participating employers where benefits are provided under a negotiated collective agreement, if it reasonable to conclude that the trustees could not reasonably have known about the participation of certain non-employee contractors who are members of the union, the participation of the contractors may not necessarily result in a breach of the terms that govern the plan.

Paragraph 144.1(3)(b) is amended to remove the restriction that an ELHT cannot be operated or maintained primarily for the benefit of one or more key employees or their family members. This amendment is consequential on new conditions added to paragraph 144.1(2)(e) that limit the amount of benefits that can be offered to key employees under the private health services plan portion of an ELHT where the other conditions are not met.

Paragraph 144.1(3)(b) is replaced by a restriction that an ELHT may not deduct any amount pursuant to subsection 104(6) for that taxation year if the trust provides any benefits in respect of which the contributions are not deductible in computing the income of an employer in respect of any taxation year. For example, fitness club memberships paid for by an employer for its employees are generally not deductible by the employer in computing its taxable income for the year. If such benefits are provided by an ELHT in a year, the trust would not be eligible to claim deductions under subsection 104(6) for the year.

Deductibility – collectively bargained or similar agreement

Subsection 144.1(6) provides a special rule to accommodate the deductibility of employer contributions to an ELHT that meet certain conditions. This subsection is amended to remove the multi-employer test from the listed conditions. Whether an ELHT is a single-employer or multi-employer arrangement, deductibility is provided for contributions made pursuant to a collective bargaining agreement (or a participation agreement provided that the benefits are substantially the same as under the related collective bargaining agreement) and by reference to number of hours worked (or a similar measure).

Subsection 144.1(6) is also amended to provide for the deductibility of employer contributions to an ELHT if there is a legal requirement under the terms of the trust for each employer to participate, there are a minimum of 50 eligible employee-beneficiaries and each employee deals at arm's length with each participating employer.

Conditions – deemed employee life and health trust

New subsection 144.1(14) provides that a trust that meets certain conditions may be deemed to be an ELHT. Essentially, this deeming provision allows health and welfare trusts that are established in connection with collectively bargained plans, and generally comply with most of the ELHT rules, to be deemed to be an ELHT until such time as the plans are renegotiated and the trust is able to comply with all of the conditions to be an ELHT.

A trust must notify the Minister of National Revenue in prescribed form and manner in order to be deemed to be an ELHT.

Deemed employee life and health trust

New subsection 144.1(15) provides the consequences of a trust meeting the conditions under new subsection 144.1(14). In particular, paragraph 144.1(15)(a) provides that a trust meeting those conditions will qualify as a deemed ELHT until the earliest of the end of 2022, the day the trust satisfies all of the conditions in subsection 144.1(2) to be an ELHT and the day the trust no longer meets the condition that all or substantially all of the employee benefits provided by the trust are designated employee benefits.

Budget 2018 announced that the Canada Revenue Agency would no longer apply its administrative guidelines for health and welfare trusts after 2020. (This was extended, so that the Canada Revenue Agency would continue to apply its administrative guidelines for these trusts until the end of 2021.) Paragraph 144.1(15)(a) effectively provides an extended period (as late as the end of 2022) for collectively bargained health and welfare trusts described in subsection 144.1(14) to transition to the rules in section 144.1 that apply to ELHTs.

Paragraph 144.1(15)(b) provides that where a trust is deemed to be an ELHT because it meets the conditions in subsection 144.1(14), then paragraph 144.1(3)(a) does not apply. Accordingly, a trust that is deemed to be an ELHT, but does not satisfy (for a limited period of time) conditions set out in subsection 144.1(2), is not prevented from deducting certain amounts under subsection 104(6), including the deduction of non-capital losses.

Trust-to-trust transfer

New subsection 144.1(16) permits the transfer of property on a tax-deferred basis, where the Minister has been notified in prescribed form, from a trust that provides employee benefits substantially all of which are designated employee benefits to an ELHT or to another trust that provides employee benefits substantially all of which are designated employee benefits. This is to permit the effective merger of one or more health and welfare trusts that choose to continue as an ELHT.

Where this provision applies, each property transferred is deemed to be transferred to the receiving trust for an amount equal to the cost amount of the property to the transferor trust immediately before the time of the transfer.

Deductibility of transferred property

New subsection 144.1(17) provides that, for the purpose of the transition from a health and welfare trust to an ELHT, any transfers of property are considered to not be a contribution to the receiving trust in respect of subsections 144.1(4) to (6) and are not deductible by any participating employer.

Requirement to file

New subsection 144.1(18) provides that, unless subsection 144.1(15) or (16) applies, an ELHT must notify the Minister in prescribed form, on or before its first filing-due date after 2021, that it is an ELHT if:

• prior to February 27, 2018 it provided employee benefits substantially all of which are designated employee benefits (i.e., it was a health and welfare trust); and
• after February 26, 2018, it became an employee life and health trust because it satisfies the conditions in subsection 144.1(2).

The combined effect of subsections 144.1(14) to (16) and (18) is to require each health and welfare trust to report to the Canada Revenue Agency that it has converted to an ELHT and is subject to the ELHT rules in section 144.1.

The amendments to section 144.1 come into force on February 27, 2018.

Clause 31

Registered retirement savings plans

Section 146 of the Act provides the rules for registered retirement savings plans (RRSPs). A number of amendments are being made in this regard.

Restriction – financially dependent (basic personal amount)

Certain tax provisions apply in relation to the treatment of retirement savings on the death of an individual in situations where a recipient of the savings is a financially dependent child or grandchild of the deceased individual. Subsection 146(1.1) sets out a rebuttable presumption that a child or grandchild of a deceased registered retirement savings plan annuitant is not financially dependent on the deceased annuitant if the income of the child or grandchild exceeds the amount specified in that subsection. The amount is the basic personal amount for the preceding taxation year plus, if the financial dependence is due to mental or physical infirmity, the disability amount determined by subsection 118.3(1).

Consequential on the introduction of the new basic personal amount calculation in new subsection 118(1.1), the description of A in this subsection is amended to refer to the unreduced maximum amount determinable under subsection 118(1.1) (i.e., the amount determined for F in that subsection).

For more information on the computation of the new basic personal amount, see the commentary on new subsection 118(1.1).

This amendment applies to the 2021 and subsequent taxation years.

Transfer of funds – advanced life deferred annuities

Subsection 146(16) allows a taxpayer to transfer funds on a tax-deferred basis from their registered retirement savings plan (RRSP) to registered vehicles listed in that subsection, before the maturity of the transferor RRSP.

Consequential on the introduction of advanced life deferred annuities under new section 146.5, subsection 146(16) is amended by adding paragraph (a.1) to permit an RRSP annuitant to transfer an amount on a tax-deferred basis from an RRSP to a licensed annuities provider to acquire an advanced life deferred annuity for the benefit of the RRSP annuitant.

For more information on the rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

This amendment comes into force on January 1, 2020.

Clause 32

Registered retirement income funds – advanced life deferred annuities

Section 146.3 of the Act sets out the rules for registered retirement income funds (RRIFs).

Acceptance of fund for registration

Paragraph 146.3(2)(f) prohibits a RRIF from receiving property other than property transferred from the registered vehicles listed in that paragraph.

Paragraph 146.3(2)(f) is amended consequential on the introduction of advanced life deferred annuities (ALDA) under new section 146.5. An ALDA contract must include a stipulation that a portion of amounts transferred to acquire an ALDA may be refunded to the annuitant or to specified registered vehicles (including a RRIF), if the refund is paid to reduce Part XI taxes payable by the annuitant. As a consequence, new subparagraph 146.3(2)(f)(ix) will permit a refund from an ALDA to be transferred to a RRIF held by the ALDA annuitant.

Transfer of funds

Subsection 146.3(14.1) provides for a tax-deferred transfer of an amount from an annuitant's RRIF to a money purchase provision of a registered pension plan, or to an annuitant's account under a pooled registered pension plan, under certain circumstances.

Consequential on the introduction of advanced life deferred annuities under new section 146.5, subsection 146.3(14.1) is amended to add paragraph (c) to permit a RRIF annuitant to transfer an amount on a tax-deferred basis from a RRIF to a licensed annuities provider to acquire an advanced life deferred annuity for the benefit of the RRIF annuitant.

For more information on the rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

The amendments to section 146.3 come into force on January 1, 2020.

Clause 33

Registered disability savings plans

Section 146.4 of the Act sets out the rules for registered disability savings plans (RDSPs). Section 146.4 is being amended to permit an RDSP to remain registered on an indefinite basis after the beneficiary is no longer a "DTC-eligible individual" (as defined in subsection 146.4(1)), subject to conditions that will apply in the years subsequent to the loss of DTC eligibility.

Definitions

"disability savings plan"

A "disability savings plan" of a beneficiary is an arrangement between a trust company (referred to as the issuer of the disability savings plan) and one or more entities listed in subparagraph (a)(ii) of the definition. Paragraph (c) of the definition requires that the beneficiary be a "DTC-eligible individual" in the year in which the arrangement is entered into.

Paragraph (c) of the definition is amended to permit a DTC-ineligible beneficiary to transfer an existing RDSP to a new RDSP issued by another financial institution. In particular, it permits an RDSP to be established in a year in which the beneficiary is no longer DTC-eligible, if it is established by way of a transfer from another RDSP and if the transfer satisfies the conditions set out in subsection 146.4(8). This amendment is consequential on amendments to section 146.4 that permit an RDSP to remain open on an indefinite basis despite DTC ineligibility.

This amendment comes into force on January 1, 2021.

Plan conditions

Subsection 146.4(4) sets out conditions applicable to the registration of RDSPs.

Paragraph 146.4(4)(f) requires that a disability savings plan prohibit contributions from being made in a year in respect of which its beneficiary is no longer a "DTC-eligible individual" (as defined in subsection 146.4(1)) or after the death of the beneficiary. An exception is provided for a tax-deferred rollover of proceeds from a registered plan (i.e., a "specified RDSP payment", as defined in subsection 60.02(1)).

Consequential on the repeal of subsection 146.4(4.1), subparagraph 146.4(4)(f)(i) is amended to remove the reference to the election on cessation of DTC eligibility. For further information, see the commentary on subsections 146.4(4.1) to (4.3).

This amendment comes into force on January 1, 2021.

Paragraph 146.4(4)(n) imposes a limit on the amount of disability assistance payments that can be made in a calendar year from an RDSP when the plan is a primarily government-assisted plan (i.e., where the total of all grants and bonds paid under the Canada Disability Savings Act in respect of the beneficiary of the plan exceeds the total of all private contributions made in respect of the beneficiary, as described in the opening portion of paragraph 146.4(4)(n)). Primarily government-assisted plans are subject to the "specified maximum amount" limit, as defined in subsection 146.4(1).

Subparagraph 146.4(4)(n)(i) is amended to refer to new clauses 146.4(4)(p)(ii)(A) and (B). If the beneficiary has no severe and prolonged impairments with the effects described in paragraph 118.3(1)(a.1) (i.e., the beneficiary becomes DTC-ineligible), and if the holder of the plan requests that the plan be terminated, the "specified maximum amount" definition will not apply to limit the amount to be withdrawn from the plan upon termination.

This amendment comes into force on January 1, 2021.

Paragraph 146.4(4)(p) provides rules related to the termination of an RDSP. Currently, apart from termination by the end of the year following the death of the beneficiary, an RDSP must be terminated by the end of the calendar year following the first calendar year throughout which the beneficiary is DTC-ineligible (unless an election under subsection 146.4(4.1) is filed to permit the plan to remain open for five years after the DTC ineligibility).

Subparagraph 146.4(4)(p)(ii) is amended to no longer require the termination of an RDSP after the beneficiary becomes DTC-ineligible and to permit the plan to remain open indefinitely. It is further amended to permit a holder to voluntarily terminate the RDSP, subject to conditions that apply on plan termination, where the beneficiary no longer has severe and prolonged impairments with the effects described in paragraph 118.3(1)(a.1) (i.e., if the beneficiary is DTC-ineligible).

These amendments apply as of January 1, 2021.

Transitional rule

New subsection 146.4(4.01) contains a transitional rule permitting certain RDSPs to remain open on an indefinite basis.

Amendments to subsections 146.4(4) to (4.3) allow an RDSP to remain open after a beneficiary becomes ineligible for the disability tax credit. Under new subsection 146.4(4.01), if the beneficiary of an RDSP is DTC-ineligible on or after March 19, 2019 and before 2021, it is not required that the plan be terminated, notwithstanding the plan's terms. In addition, if an election was made under subsection 146.4(4.1) (to enable the RDSP holder to maintain the RDSP for up to five years after the beneficiary has become DTC-ineligible) and the election ceases to be valid between March 19, 2019 and 2021, it is not required that the plan be terminated.

For more information, see the commentary on the repeal of subsections 146.4(4.1) to (4.3).

Election on cessation of DTC eligibility

ITA
146.4(4.1) to (4.3)

Subsections 146.4(4.1) to (4.3) enable an RDSP holder to elect to keep the RDSP open for up to five years after its beneficiary has become DTC-ineligible. Subsection 146.4(4.1) sets out conditions that a holder of an RDSP must meet in order to make an election to keep the RDSP open in respect of a beneficiary who is DTC-ineligible for a particular taxation year, including providing medical certification that the beneficiary is likely going to become DTC-eligible again.

Subsections 146.4(4.1) to (4.3) are repealed, consequential on the amendment to paragraph 146.4(4)(p), which permits an RDSP to remain open on an indefinite basis after the beneficiary loses DTC eligibility. While the beneficiary is DTC-ineligible, contributions are prohibited under paragraph 146.4(4)(f). If the beneficiary regains eligibility for the DTC, contributions to the plan are permitted as the general RDSP rules will apply.

This amendment comes into force on January 1, 2021.

Clause 34

Advanced life deferred annuity

New section 146.5 of the Act provides the tax framework for benefits paid out of an annuity that qualifies as an advanced life deferred annuity (ALDA) acquired by tax-deferred transfers from registered pension plans (RPPs), registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), deferred profit sharing plans (DPSPs) and pooled registered pension plans (PRPPs).

Definitions

New subsection 146.5(1) defines terms that are relevant for the purposes of new section 146.5.

"advanced life deferred annuity"

The definition "advanced life deferred annuity" (ALDA) provides the conditions that an annuity contract must meet to qualify as an ALDA.

Under paragraphs (a) and (b) of the definition, the annuity contract must be issued by a licensed annuities provider (as defined in subsection 248(1)) and must specify that it is intended to qualify as an ALDA under the Act.

Paragraphs (c) and (d) of the definition provide the conditions that apply to periodic annuity payments from an ALDA. The payments must begin by the end of the calendar year in which the annuitant (as defined in subsection 146.5(1)) turns 85 years of age and must be payable as a single-life annuity (i.e., payments for the lifetime of the annuitant) or as a joint-lives annuity until the last-to-die of the annuitant and the annuitant's spouse or common-law partner. For the meaning of the terms "common-law partner" and "spouse", see subsections 248(1) and 252(3), respectively.

The periodic annuity payments must be in equal amounts unless they are adjusted to reflect increases in the Consumer Price Index or at an annual rate not exceeding 2%. The payments may be reduced on the death of either the annuitant or the annuitant's spouse or common-law partner. For example, a pension that pays $1,000 per month to the annuitant and $600 per month to the spouse after the death of the annuitant (commonly known as a joint-and-survivor 60% annuity) is a permitted exception to "equal amounts".

If an annuitant dies before a joint-lives annuity becomes payable, and if the surviving spouse chooses to commence the periodic annuity payments at an earlier date than the date that payments would have commenced to be paid if the deceased annuitant were alive, then paragraph (e) of the definition requires that the payment amount be adjusted in accordance with generally accepted actuarial principles.

Paragraph (f) of the definition describes the sole type of lump sum death benefit payable from an ALDA. After the annuitant's death (or, in the case of a joint-lives annuity, after the death of both the annuitant and the spouse or common-law partner), a death benefit may be paid to one or more beneficiaries. The death benefit must be paid as soon as practicable (generally within one year of the death of the last annuitant) and in an amount not exceeding the total amounts transferred to purchase the annuity less the total annuity payments made from the ALDA.

Paragraph (g) of the definition requires that the annuity contract must provide for a refund of a portion of amounts transferred to acquire an ALDA, if that refund would reduce the tax payable by the annuitant under new Part XI of the Act (i.e., a tax that applies on transfer amounts that exceed specified limits). The refund must be paid to any of the annuitant, the issuer of a registered retirement savings plan of the annuitant, the carrier of a registered retirement income fund of the annuitant, the administrator of a pooled registered pension plan under which the annuitant is a member and a money purchase provision of a registered pension plan under which the annuitant is a member.

Paragraph (h) of the definition requires that, if an annuity contract permits a deceased annuitant's spouse or common-law partner to request a lump sum payment under the annuity contract in lieu of annuity payments to which the spouse or common-law partner is entitled to under subparagraph (c)(ii), the lump sum cannot exceed the present value of the forgone annuity payments.

Paragraph (i) of the definition requires the annuity contract to stipulate that no right under the contract is capable of being assigned, charged, anticipated, given as security or surrendered. It should be noted that the commutation of annuity payments described in paragraph (h) would not be considered to be a surrender of benefits.

Paragraph (j) of the definition prohibits any payment from an ALDA that is not expressly provided for in the other paragraphs of the definition. That is, distributions out of an ALDA are limited to annuity payments described in paragraphs (c) to (e), a death benefit described in paragraph (f), a refund amount described in paragraph (g), or a commuted value described in paragraph (h).

"annuitant"

An annuitant is defined as an individual who has acquired an ALDA contract.

Note that an ALDA may be acquired solely by means of a transfer of assets from an RPP, RRSP, RRIF, DPSP or PRPP. For more information, see the commentary on the amendments to subsections 146(16) and 146.3(14.1) and paragraphs 147(19)(d), 147.3(1)(c) and 147.5(21)(c).

"beneficiary"

A beneficiary is defined as an individual who is entitled to receive survivor benefits from an ALDA after the death of the annuitant (or after the death of the annuitant's spouse or common-law partner).

Taxable amounts

New subsections 146.5(2) to (7) generally require that all benefits distributed from an ALDA be included in the income of a taxpayer.

Subsection 146.5(2) requires that annuity payments received by a taxpayer in a taxation year be included in the taxpayer's income for the taxation year. Note that because of paragraph (c) of the definition "advanced life deferred annuity" in subsection 146.5(1), annuity payments from an ALDA are payable only to the annuitant, or after the death of the annuitant, to the annuitant's spouse or common-law partner, including amounts deemed to have been received under paragraph 146.5(7)(a).

Subsection 146.5(3) applies to a lump sum death benefit paid in accordance with paragraph (f) of the definition "advanced life deferred annuity" in subsection 146.5(1). Paragraph 146.5(3)(a) requires that the death benefit be included in the recipient's income in the taxation year it is received, if the recipient is the spouse or common-law partner of the deceased individual, or a child or grandchild who was financially dependent on the deceased individual for support. Where the recipient of the death benefit is a beneficiary not described in paragraph 146.5(3)(a), then paragraph 146.5(3)(b) requires that the amount of the death benefit be included in the income of the deceased annuitant.

Subsection 146.5(4) applies in the case of a refund described under clause (g)(ii)(A) of the definition "advanced life deferred annuity" in subsection 146.5(1). The amount of the refund that is paid directly to the annuitant is included in computing the income of the annuitant.

Subsection 146.5(5) contains four rules that apply to an amount refunded from an ALDA that is transferred directly to a registered vehicle.

• First, the refunded amount is not included in the income of a taxpayer.
• Second, a taxpayer may not claim an income deduction for the amount paid to a registered plan.
• Third, for the purposes of Parts LXXXIII and LXXXV of the Income Tax Regulations, a refund paid to a registered pension plan is not considered to be a contribution to the plan. As a notable consequence, the payment to a registered pension plan will not be included for the purpose of determining the plan member's pension adjustment.
• Fourth, if a refund from an ALDA is transferred directly to an RRSP or a pooled registered pension plan, it will not be included when determining if the taxpayer has an RRSP over-contribution amount. Specifically, it is not included as an "undeducted RRSP premium" under subsection 204.2(1.2).

Subsection 146.5(6) deals with situations in which a lump sum death benefit is paid in accordance with paragraph (f) of the definition "advanced life deferred annuity" in subsection 146.5(1) to a deceased annuitant's estate and a qualifying beneficiary of the estate wishes to effect a tax-deferred rollover to an arrangement (e.g., RRSP or RRIF) in accordance with paragraph 60(l). Subsection 146.5(6) allows the legal representative of a deceased annuitant's estate and a qualifying beneficiary to jointly designate that the death benefit was received by the beneficiary and not the legal representative. The beneficiary (within the meaning of subsection 108(1)) must be, immediately before the death of the annuitant, a spouse or common-law partner of the deceased annuitant or a child or grandchild who was financially dependent on the deceased annuitant. When such a designation is made, the death benefit will be included in the income of the qualifying beneficiary and not in the income of the deceased annuitant. An offsetting deduction is available under paragraph 60(l) for any portion of the amount that is paid to a qualifying arrangement.

Subsection 146.5(7) applies if an amendment made to an ALDA contract results in it no longer meeting the conditions to qualify as an ALDA contract. In that case, the annuitant (whether the original annuitant or a survivor annuitant) of the contract immediately before the amendment is made is deemed to have received an amount equal to the fair market value of the contract. Note that subsection 146.5(2) requires that the amount be included in the income of the annuitant. The annuitant is also deemed to have acquired a new annuity contract, at a cost equal to the fair market value of the ALDA contract immediately before the amendment.

New section 146.5 comes into force on January 1, 2020.

Clause 35

Deferred profit sharing plans – advanced life deferred annuities

Section 147 of the Act sets out the rules for deferred profit sharing plans (DPSPs).

Acceptance of plan for registration

Paragraph 147(2)(k) requires that a DPSP provide for amounts vested in an employee to become payable no later than the end of the year in which the employee turns 71 years of age. It permits, among other benefit options, that the vested amounts may be used to purchase an annuity (by the end of the year of the member turning 71 years of age).

Subparagraph 147(2)(k)(vi) is amended to exclude advanced life deferred annuities from the requirements under paragraph 147(2)(k). Note that the start date of annuity payments from an ALDA may be deferred until the end of the year in which the annuitant turns 85 years of age.

Paragraph 147(2)(k.1) provides that, in order to qualify for registration as a DPSP, a profit sharing plan must contain a requirement that no benefit or loan which is dependent on the existence of the plan may be conferred on a beneficiary or person with whom the beneficiary does not deal at arm's length. Subparagraph 147(2)(k.1)(ii.1) provides an exemption for amounts paid out of a DPSP to purchase an annuity.

Subparagraph 147(2)(k.1)(ii.1) is amended to extend the exemption to amounts transferred out of a DPSP in accordance with subparagraph 147(19)(d)(v) to acquire an advanced life deferred annuity.

For more information on the rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

Transfer to RPP, RRSP or DPSP

Subsection 147(19) provides for a tax-deferred transfer on behalf of an individual of a lump sum amount from a DPSP to certain other registered vehicles for the individual's benefit.

Consequential on the introduction of advanced life deferred annuities under new section 146.5, paragraph 147(19)(d) is amended by adding a subparagraph (v) to permit a DPSP member to transfer an amount from a DPSP to a licensed annuities provider to acquire an advanced life deferred annuity for the benefit the member.

For more information on the rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

The amendments to section 147 come into force on January 1, 2020.

Clause 36

Transfer of funds from registered pension plan

Section 147.3 of the Act provides rules for the transfer of funds from registered pension plans (RPPs) to registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and other RPPs.

Transfer of funds – advanced life deferred annuities

Subsection 147.3(1) permits a tax-deferred transfer on behalf of an individual of a lump sum amount from a money purchase provision of a registered pension plan (RPP) to a money purchase provision of another RPP or to certain other retirement savings vehicles.

Consequential on the introduction of advanced life deferred annuities under new section 146.5, paragraph 147.3(1)(c) is amended by adding subparagraph (iv) to permit an RPP member to transfer an amount from an RPP to a licensed annuities provider to acquire an advanced life deferred annuity for the benefit of the member.

For more information on the rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

This amendment comes into force on January 1, 2020.

Transfer of funds – Individual pension plans

Subsection 147.3(3) permits a tax-deferred transfer of assets from a defined benefit provision of a registered pension plan to a defined benefit provision of another registered pension plan where certain conditions are met. Paragraph 147.3(3)(c) requires that the assets be transferred to another registered pension plan to be held in connection with a defined benefit provision of that recipient plan.

Paragraph 147.3(3)(c) is amended to prohibit tax-deferred transfers to an individual pension plan (as defined in subsection 8300(1) of the Income Tax Regulations – the "Regulations") where the transfer relates to benefits attributable to employment with a former employer that is not a participating employer (defined in subsection 147.1(1)) or its predecessor employer as (defined in subsection 8500(1) of the Regulations).

If a transfer of assets from a defined benefit provision of a registered pension plan to a defined benefit provision of an individual pension plan does not meet the conditions in subsection 147.3(3), it will not qualify as a tax-deferred transfer under subsection 147.3(9) and the full amount of the transfer will be included in the plan member's income pursuant to subparagraph 56(1)(a)(i).

This amendment comes into force on March 19, 2019.

Clause 37

RPP annuity contract

Where an individual acquires ownership of an annuity in satisfaction of the individual's entitlement to benefits under a registered pension plan (RPP) and certain other conditions are met, subsection 147.4(1) of the Act deems the individual not to have received an amount from the RPP as a result of acquiring the annuity and deems amounts received under the contract to be amounts received under the RPP. Payments made out of the annuity contract are included in the annuitant's income as a "superannuation or pension benefit" under subparagraph 56(1)(a)(i).

Paragraph 147.4(1)(a) is amended to exclude an "advanced life deferred annuity" (as defined in new subsection 146.5(1)) from the application of section 147.4. Benefits paid out of an advanced life deferred annuity will be included in the annuitant's income under new section 146.5 and new paragraph 56(1)(z.5).

For more information on the rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

This amendment comes into force on January 1, 2020.

Clause 38

Pooled registered pension plans

Section 147.5 of the Act provides the rules for pooled registered pension plans (PRPPs).

Definitions

The definition "qualifying annuity" in subsection 147.5(1) is relevant for the purposes of a transfer described in paragraph 147.5(21)(c) from a PRPP. A qualifying annuity may be purchased for the benefit of an individual described in paragraph 147.5(21)(b).

The definition "qualifying annuity" in subsection 147.5(1) is amended to exclude an "advanced life deferred annuity" (as defined in new subsection 146.5(1)). Benefits paid from an advanced life deferred annuity acquired by a transfer of funds from a PRPP will be included in the annuitant's income under new section 146.5 (and not be included in income under section 147.5).

For more information on the tax rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

Permissible benefits

Subsection 147.5(5) specifies the types of benefits that may be provided by a PRPP.

Paragraph 147.5(5)(a) is amended by adding a reference to new paragraph 8506(1)(e.2) of the Income Tax Regulations. A member of a PRPP may acquire an entitlement to a variable payment life annuity under the same conditions that apply to a member of a money purchase provision of a registered pension plan.

For more information about variable payment life annuities, see the commentary on new paragraph 8506(1)(e.2), and new subsection 8506(13), of the Income Tax Regulations.

Transfer of amounts

Subsection 147.5(21) provides conditions relating to a tax-deferred transfer of an amount from a PRPP member's account to certain other registered vehicles or for the purchase of a qualifying annuity.

Consequential on the introduction of advanced life deferred annuities under new section 146.5, paragraph 147.5(21)(c) is amended by adding a subparagraph (vi) to permit a PRPP annuitant to transfer an amount from a PRPP to a licensed annuities provider to acquire an advanced life deferred annuity for the benefit of the member.

For more information on the tax rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

The amendments to section 147.5 come into force on January 1, 2020.

Clause 39

Qualified donees – definitions

Section 149.1 of the Act provides a number of rules applicable to "qualified donees", which includes registered charities.

Listed terrorist entities

Subsection 149.1(1) provides a number of definitions that apply to registered charities and other qualified donees.

"ineligible individual"

Registered charities and Canadian amateur athletic associations may have their special income tax status revoked or be refused such status, or they may have their authority to issue official donation receipts suspended, if an individual with significant influence on the organization has a history of certain misconduct, as set out in the definition "ineligible individual".

The definition "ineligible individual" is amended to include individuals who have at any time been a listed terrorist entity (as discussed below), or a member of a listed terrorist entity, as well as individuals who were in certain positions of influence in respect of a listed terrorist entity during a period in which that entity supported or engaged in terrorist activities.

"qualifying journalism organization"

The definition "qualifying journalism organization" is relevant for the purposes of the labour tax credit in section 125.6.

The definition is amended to add a requirement that the organization be primarily engaged in the production of original news content. This is consequential on the removal of this condition from the definition "qualified Canadian journalism organization"in subsection 248(1).

This amendment comes into force on January 1, 2019.

"listed terrorist entity"

Subsection 149.1(1) is amended to add the definition "listed terrorist entity". This definition is relevant for the definition "ineligible entity", as discussed above, and also for the purposes of the revocation rules in sections 168 and 188. A "listed terrorist entity" is, in general terms, a person or an organization that is a "listed entity" as defined in subsection 83.01(1) of the Criminal Code.

Ceasing to qualify as a listed terrorist entity – retroactive deeming rule

Subsection 149.1(1.02) is added in respect of the new rules for "listed terrorist entities". It provides that if an entity is removed from the list further to an application made under subsection 83.05(2), or as a result of paragraph 83.05(6)(d), of the Criminal Code, the entity is deemed not to have become a listed terrorist entity.

Revocation of registration – false statements

Paragraph 149.1(4.1)(c) allows the Minister of National Revenue to revoke the registration of a registered charity if a false statement was made – in circumstances amounting to culpable conduct – in the furnishing of information for the purpose of obtaining registration of the charity. For these purposes, the expressions "false statement" and "culpable conduct" are as defined in subsection 163.2(1).

Paragraph 149.1(4.1)(c) is amended to provide that the Minister may also revoke the registration of a charity where such a false statement is made for the purpose of maintaining its registration.

Clause 40

Assessments – refunds and deemed payments

Subsection 152(1) of the Act lists certain refunds and deemed payments on account of tax that are to be determined in the course of assessing a taxpayer's tax. Paragraph 152(1)(b) refers to the specific provisions under which amounts are deemed to be paid on account of tax.

This paragraph is amended to add a reference to new subsection 125.6(2.1). This subsection deems an amount to have been paid on account of tax payable by a member of a partnership that qualifies for the refundable labour tax credit for journalism organizations.

This amendment comes into force on January 1, 2019.

Paragraph 152(1)(b) is further amended to reinstate the amendment that added a reference to subsection 122.5(3.001), in respect of the special GST credit for COVID-19. This amendment comes into force on March 25, 2020.

The previous references to subsections 125.7(2) and (2.1) in paragraph 152(1)(b) are not being reinstated. As such, they are repealed. These references have been found to be unnecessary in light of the similar rules in subsection 152(3.4).

COVID-19 – notice of determination

Subsection 152(3.4) allows the Minister of National Revenue to determine the amount deemed by subsection 125.7(2) or (2.1) (the Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy) to be an overpayment, or to determine that there is no overpayment, and send a notice of determination to a taxpayer. This allows taxpayers to object to, and appeal from, the Minister's determination.

This subsection is amended to add a reference to the Canada Recovery Hiring Program credit in new subsection 125.7(2.2).

Applicable reassessment period

Subsection 152(4) generally provides that the Minister of National Revenue may at any time assess tax and other amounts payable by a taxpayer for a taxation year, but may not assess after the normal reassessment period for the year. Subsection 152(4) includes exceptions that apply in certain circumstances.

Paragraph 152(4)(b) describes the circumstances in which the Minister of National Revenue may, after a taxpayer's normal reassessment period for a taxation year, assess tax payable under Part I for the year. Clause 152(4)(b)(iii)(A) applies where the assessment is made as a consequence of a "transaction" involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm's length.

Clause 152(4)(b)(iii)(A) is amended to provide that the definition "transaction" in subsection 247(1) is to be used for the purpose of this provision, with the result that a transaction under clause 152(4)(b)(iii)(A) would include an "arrangement or event".

This amendment applies to taxation years for which the normal reassessment period ends after March 18, 2019.

Clause 41

Withholding

Section 153 requires the withholding of tax from certain payments described in paragraphs 153(1)(a) to (t). The person making such a payment is required to remit the amount withheld to the Receiver General.

Consequential on the introduction of rules relating to advanced life deferred annuities under new section 146.5, paragraph (u) is added to subsection 153(1) to require the withholding of tax on payments out of or under an advanced life deferred annuity.

This amendment comes into force on January 1, 2020.

Clause 42

Reduced instalments

Section 157 of the Act requires a corporation to pay monthly instalments of its total tax payable under Parts I, VI, VI.1 and XIII.1 of the Act. Subsection 157(3) allows certain corporations to reduce their monthly tax instalment payments by certain refundable amounts under the Act.

Paragraph 157(3)(e) is amended to add a reference to new subsection 125.6(2.1), which provides a refundable labour tax credit for qualifying members of a journalism organization organized as a partnership.

This amendment comes into force on January 1, 2019.

Amount of payment – three-month period

Subsection 157(1.1) allows small Canadian-controlled private corporations that meet certain conditions to pay their annual tax liability by quarterly instalments instead of monthly. Subsection 157(3.1) allows these corporations to reduce each quarterly instalment by ¼ of the amount of certain tax refunds. Paragraphs 157(3.1)(b) and (c) list these tax refunds.

Paragraph 157(3.1)(c) is amended to add a reference to new subsection 125.6(2.1). This subsection provides a refundable labour tax credit for qualifying members of journalism organizations that are partnerships.

This amendment comes into force on January 1, 2019.

Clause 43

Penalties

Section 163 of the Act imposes penalties in respect of serious failures to comply with the Act.

False statements or omissions

Subsection 163(2) imposes a penalty where a taxpayer knowingly, or in circumstances amounting to gross negligence, participates in or makes a false statement for the purposes of the Act. The penalty is determined by reference to the understatement of tax or the overstatement of amounts deemed to be paid on account of tax.

Paragraph 163(2)(h) relates to the labour tax credit for qualifying journalism organizations in subsection 125.6(2).

Subparagraph 163(2)(h)(i) is amended to add a reference to new subsection 125.6(2.1). For more information, see the commentary on that subsection.

This amendment comes into force on January 1, 2019.

Paragraph 163(2)(i) relates to the credit in respect of the Canada Emergency Wage Subsidy and the Canada Emergency Rent Subsidy under subsections 125.7(2) and (2.1), respectively.

Paragraph 163(2)(i) is amended to provide that it also applies in respect of the Canada Recovery Hiring Program credit under new subsection 125.7(2.2).

Penalty – COVID-19

New subsection 163(2.902) provides a penalty where the anti-avoidance rule in subsection 125.7(6.1) applies to an eligible entity in respect of a deemed overpayment that was claimed under subsection new 125.7(2.2) – the credit under the Canada Recovery Hiring Program. The penalty is equal to 25% of the amount that would have been the deemed overpayment if the amount of the overpayment were calculated by reference to the information provided in the application filed for the deemed overpayment.

Clause 44

Refunds

Section 164 of the Act contains rules relating to refunds of taxes.

Refund of overpayment

Subsection 164(1) provides rules governing refunds of overpayments of tax. Subparagraph 164(1)(a)(ii) set out circumstances where the Minister of National Revenue may, before mailing the notice of reassessment for the year, refund all or part of an amount claimed in the taxpayer's return as an overpayment for the year.

Subparagraph 164(1)(a)(ii) is amended to authorize the Minister of National Revenue to refund all or part of a taxpayer's claim in respect of an amount under new subsection 125.6(2.1) in respect of the refundable labour tax credit for qualifying members of journalism organizations that are partnerships.

This amendment comes into force on January 1, 2019.

COVID-19 refunds

Subsection 164(1.6) authorizes the Minister of National Revenue to refund to a taxpayer, at any time after the beginning of a taxation year of a taxpayer in which an overpayment is deemed to have arisen under subsection 125.7(2) or (2.1) (the Canada Emergency Wage Subsidy and Canada Emergency Rent Subsidy, respectively), any or all of the deemed overpayment of tax.

This subsection is amended to add a reference to new subsection 125.7(2.2), which provides the Canada Recovery Hiring Program credit.

Clause 45

Revocation of registration – listed terrorist entities

Subsection 168(3.1) is added to provide for the automatic revocation of the registration of a qualified donee (which includes a registered charity) upon it becoming a "listed terrorist entity". For more information on the new definition "listed terrorist entity", refer to the commentary under section 149.1.

Clause 46

Designation of qualified Canadian journalism organizations

New section 168.1 of the Act provides rules with respect to the timing of the designation and revocation of a qualified Canadian journalism organization, as defined in subsection 248(1).

Date of designation

New subsection 168.1(1) provides that where an organization applies for a designation for the purpose of the definition "qualified Canadian journalism organization" in subsection 248?(1), the organization is deemed to have become designated on the date that the organization applies for designation with the Canada Revenue Agency, unless otherwise specified by the Minister of National Revenue.

Revocation of designation

New subsection 168.1(2) provides that the Minister of National Revenue may, at any time, revoke the designation of an organization that is a "qualified Canadian journalism organization" (as defined in subsection 248(1)) and that, for that purpose, the Minister shall take into account any recommendations of a body established for the purpose of that definition.

Notice and date of revocation

New subsection 168.1(3) provides that if the designation of an organization is revoked, the Minister of National Revenue shall provide notice to the organization in writing. This new subsection also provides that the revocation is deemed to be effective as of the date on which the notice is sent to the organization, or at an earlier date specified by the Minister.

These amendments come into force on January 1, 2019.

Clause 47

Deemed year-end on notice of revocation

Part V of the Act provides rules in respect of a penalty tax for qualified donees (which includes registered charities) that have their registration revoked. For these purposes, subsection 188(1) creates a year-end on the occurrence of certain events.

Subsection 188(1) is amended to add to the list of events the day that an entity becomes a "listed terrorist entity" (as newly defined in subsection 149.1(1)). For more information on listed terrorist entities, refer to the commentary on section 149.1.

Clause 48

Notice of suspension of authority to issue receipts

Subsection 188.2(2) of the Act provides for a one-year suspension of the authority to issue official donation receipts for certain qualified donees (including registered charities) under certain circumstances.

New paragraph 188.2(2)(f) provides that a registered charity may be subject to such a suspension if it makes a false statement – in circumstances amounting to culpable conduct – in the furnishing of information for the purpose of maintaining its registration. For these purposes, the expressions "false statement" and "culpable conduct" are as defined in subsection 163.2(1).

Clause 49

Tax in respect of advanced life deferred annuity

New Part XI (sections 205 and 206) of the Act introduces a tax on any portion of amounts transferred to an advanced life deferred annuity (ALDA) that is a "cumulative excess amount", as defined in subsection 205(1).

Definitions

Subsection 205(1) defines various terms that apply for the purposes of section 205.

"ALDA dollar limit"

The definition "ALDA dollar limit" is important for determining if a taxpayer has a "cumulative excess amount" in respect of amounts transferred to an ALDA. The ALDA dollar limit is $150,000 for 2020. For subsequent years, it is indexed in the manner set out in section 117.1 (i.e., indexed according to increases in the Consumer Price Index), rounded to the nearest multiple of $10,000.

"cumulative excess amount"

The "cumulative excess amount" of an individual at any particular time in a calendar year is determined by the formula A – B.

Variable A is the greater of two amounts. The first amount is the total of "excess ALDA transfers" from each transfer made by the individual to acquire an ALDA. The second amount, determined by the formula C – D, is the amount by which the total transfers by the individual to an ALDA exceed the "ALDA dollar limit" for the calendar year.

Variable B is the total refunds made at or before the particular time on behalf of an individual from an ALDA to reduce the amount of tax payable by the individual under Part XI. Note that paragraph (g) of the definition "advanced life deferred annuity" in subsection 146.5(1) permits a refund directly to the member or as a repayment to the plan from which the amount was transferred.

"excess ALDA transfer"

The definition "excess ALDA transfer" is relevant to the determination of whether a taxpayer has a "cumulative excess amount" in respect of amounts transferred to an ALDA. The test for an excess ALDA transfer applies each time a transfer is made to an ALDA from a "transferor plan" (registered retirement savings plan, registered retirement income fund, deferred profit sharing plan, registered pension plan or pooled registered pension plan) under any of subsections 146(16) and 146.3(14.1) and paragraphs 147(19)(d), 147.3(1)(c) and 147.5(21)(c).

The excess ALDA transfer, if any, is determined by the formula A – B. Variable A is the amount transferred from the transferor plan to acquire an ALDA. Variable B is computed as 25% of the sum of variable C (property held for the individual's benefit under the transferor plan at the end of the prior year) plus variable D (the total amounts transferred to an ALDA from the transferor plan in a calendar year preceding the calendar year in which the transfer is made), less variable E (the total amounts transferred to an ALDA from the transferor plan prior to the particular transfer, whether in prior years or the current year).

Illustration of excess amounts:

On December 31, 2019, Ian has a $100,000 account balance in his deferred profit sharing plan (DPSP), a $200,000 balance in his registered retirement savings plan (RRSP) and a $500,000 balance in a money purchase account under a registered pension plan (RPP).

Assume that the ALDA dollar limit is $150,000 and that, apart from the transfers to an ALDA, there are no fluctuations in the value of property in Ian's registered plans for both 2020 and 2021.

The following transfers are made under a contract for an ALDA that Ian has entered into with an insurance company in Canada:

April 2020: $40,000 is transferred from the DPSP

September 2020: $40,000 is transferred from the RRSP

February 2021: $20,000 is transferred from the RRSP

June 2021: $10,000 is transferred from the RRSP

July 2021: $50,000 is transferred from the RPP

As a result of the transfer made in April 2020 from the DPSP, Ian's "cumulative excess amount" and "excess ALDA transfer" for the months April to August 2020 are calculated as follows:

The DPSP's excess ALDA transfer:

A= $40,000 transferred

= 25% ($100,000 + $0) – $0 = $25,000

A – B = $40,000 – $25,000 = $15,000

Cumulative excess amount = A – B

(a) The sum of "excess ALDA transfers" = 15,000,

B = total amounts refunded from ALDA = 0

Cumulative excess amount = A – B = $15,000

From April to August 2020, Ian is liable to pay a 1% tax per month on the cumulative excess amount, $15,000.

As a result of the transfer made in September 2020 from the RRSP, Ian's "excess ALDA transfer" and "cumulative excess amount" for the months September to December 2020 are calculated as follows:

The RRSP's excess ALDA transfer:

A = $40,000 transferred

A – B = $40,000 - $50,000 = 0

Cumulative excess amount = A – B

(a) The sum of Ian's excess ALDA transfers

= 15,000 from DPSP + 0 from RRSP = $15,000,

(b) C – D = $40,000 DPSP + $40,000 RRSP – $150,000 = 0

B = total amounts refunded from ALDA = 0

Cumulative excess amount = A – B = $15,000

Although there is no excess ALDA transfer in respect of Ian's RRSP, he continues to have a cumulative excess amount of $15,000 derived from a DPSP excess transfer amount. From September 2020 to January 2021, Ian remains liable to pay a 1% tax per month on the $15,000 cumulative excess amount.

As a result of the transfer made in February 2021 from the RRSP, Ian's "excess ALDA transfer" and "cumulative excess amount" for the months February 2021 to May 2021 are calculated as follows:

Excess ALDA transfer:

A = $20,000 transferred

= 25% ($160,000 + $40,000) – $40,000 = $10,000

A – B = $20,000 - $10,000 = $10,000

Cumulative excess amount = A – B

(a) The sum of Ian's excess ALDA transfers

= $15,000 from DPSP + $10,000 from RRSP (February 2021) = $25,000,

= $40,000 DPSP + $60,000 RRSP – $150,000 = 0

B = total amounts refunded from ALDA = 0

Cumulative excess amount = A – B = $25,000

From February to May 2021, Ian will be subject to 1% tax per month on the cumulative excess amount of $25,000.

As a result of the third RRSP transfer made in June 2021, Ian's "excess ALDA transfer" and "cumulative excess amount" for June 2021 is calculated as follows:

Excess ALDA transfer:

A = $10,000 transferred

= 25% ($160,000 + $40,000) – $60,000 = nil (absent section 257, the result of the formula would be negative $10,000)

A – B = $10,000 – $0 = $10,000

Cumulative excess amount = A – B

(c) The sum of Ian's excess ALDA transfers

= $15,000 from DPSP + $10,000 from RRSP (February 2021) + $10,000 from RRSP (June 2021) = $35,000,

= $40,000 DPSP + $70,000 RRSP – $150,000 = 0

B = total amounts refunded from ALDA = 0

Cumulative excess amount = A – B = $35,000

For June 2021, Ian is liable to pay a 1% tax per month on the cumulative excess amount of $35,000

As a result of the transfer made in July 2021 from the RPP, Ian's "excess ALDA transfer" and "cumulative excess amount" for July 2021 is calculated as follows:

Excess ALDA transfer:

A = $50,000 transferred

= 25% ($500,000 + $0) – $0 = $125,000

A – B = $50,000 – $125,000 = $0

Cumulative excess amount = A – B

(e) The sum of Ian's excess ALDA transfers

= $15,000 from DPSP + $10,000 from RRSP (February 2021) + $10,000 RRSP (June 2021) = $35,000,

= $40,000 DPSP + $70,000 RRSP + $50,000 RPP – $150,000 = $10,000

B = total amounts refunded from ALDA = 0

Cumulative excess amount = A – B = $35,000

Ian's total transfers to an ALDA exceed the ALDA dollar limit by $10,000. But his "excess ALDA transfers" ($35,000) is the greater amount. The cumulative excess amount remains at $35,000.

For July 2021 until Ian receives a refund from the ALDA, Ian will continue to be liable to pay a 1% tax per month on the amount of cumulative excess amount of $35,000.

To eliminate the Part XI tax, Ian would need to withdraw $35,000 from the ALDA. The portion of the refund repaid to the DPSP or to the RRSP is not included in Ian's income. Under new subsection 146.5(4), any portion of the refund that is not repaid to the plans (e.g., paid in cash to Ian) will be included in his income.

If Ian does withdraw $35,000 from his ALDA, the net transfers to his ALDA would be $125,000 ($160,000 transfers minus $35,000 refund). After such a withdrawal, Ian would have the option of transferring up to $25,000 (or more as the ALDA dollar limit increases) to his ALDA in future years.

Tax payable by individuals

Subsection 205(2) provides that a taxpayer is required to pay a 1% tax in respect of each month for which the taxpayer has a "cumulative excess amount" (as defined in subsection 205(1)) in respect of an ALDA at the end of that month.

Waiver of tax

Subsection 205(3) provides that the Minister of National Revenue may waive all or part of the tax under Part XI if the cumulative excess amount on which the tax is based arose as a consequence of a reasonable error and if reasonable steps are being taken to eliminate the cumulative excess amount.

Return and payment of tax

Subsection 206(1) requires a person liable for tax under Part XI for all or part of a calendar year to file a return for the year, without notice or demand, on or before the person's filing-due date for the year and to pay any tax owing on or before the person's balance-due day. Both "filing-due date" and "balance-due day" are defined in subsection 248(1).

Provisions applicable to Part

Subsection 206(2) provides that certain provisions of Part I relating to information returns, assessments, payments and appeals apply for the purposes of Part XI with any required modifications.

Part XI (sections 205 and 206) comes into force on January 1, 2020.

Clause 50

Tax in respect of employee life and health trusts

New Part XI.5 (section 207.9) of the Act introduces a special tax in respect of the acquisition of prohibited investments (and related income and capital gains) for ELHTs. This special tax is consequential on the repeal of paragraph 144.1(2)(h).

Subsection 207.9(1) contains two definitions that apply for the purposes of Part XI.5. A "participating employer" for the purposes of Part XI.5 means an employer who provides designated employee benefits for its employees through a trust described in subsection 144.1(2) (i.e., an ELHT).

A "prohibited investment" for an ELHT includes any of the following:

• a share of the capital stock of, an interest in, or a debt of a participating employer of the ELHT;
• a share of the capital stock of, an interest in, or a debt of a person or partnership that does not deal at arm's length with a participating employer of the ELHT; and
• an interest in, or a right to acquire, property described above.

Subsection 207.9(2) provides that an ELHT is liable to pay tax under Part XI.5 if the trust acquires property that is a prohibited investment, if income is received or becomes receivable by the trust from a prohibited investment or if the trust has a taxable capital gain from the disposition of a prohibited investment.

New subsection 207.9(3) provides the amount of tax payable under Part XI.5 by an ELHT. Where the trust acquires property that is a prohibited investment for the trust, paragraph 207.9(3)(a) provides for a tax equal to 50% of the fair market value of the property at the time it is acquired. Paragraph 207.9(3)(b) provides for a tax equal to 50% of any income from prohibited investments or any taxable capital gains from the disposition of prohibited investments.

Subsection 207.9(4) provides that an ELHT is entitled to a refund of any tax imposed under subsection 207.9(2) if the trust disposes of the property before the end of the calendar year following the calendar year in which the tax arose (or such later time as is permitted by the Minister of National Revenue). However, no refund is available if it is reasonable to expect that the trust knew or ought to have known at the time the property was acquired by the trust that the property was, or would become, a prohibited investment.

Subsection 207.9(5) provides a deemed disposition rule for property that becomes, or ceases to be, a prohibited investment. Subsection 207.9(5) provides that a property held by an ELHT is deemed to have been disposed of immediately before the time it became, or ceased to be, a prohibited investment for proceeds of disposition equal to the property's fair market value. The trust is also deemed to have reacquired the property for the same amount at the time of its change in status.

These amendments apply to the 2014 and subsequent taxation years.

Clause 51

COVID-19 – tax on flow-through shares

Part XII.6 (section 211.91)

Part XII.6 of the Act levies a tax on flow-through share issuers that use the "look-back" rule under subsection 66(12.66). Under that subsection, certain CEE incurred in a calendar year can be flowed through to an investor and treated as if they had been incurred at the end of the preceding calendar year.

Currently, subsection 211.91(1) applies where, because of the application of subsection 66(12.66), a corporation renounces an amount in a calendar year under subsection 66(12.6) in respect of an agreement entered into in the previous calendar year. Where this is the case, the corporation must pay a tax in respect of each month of the calendar year (other than January) of renunciation. The tax is generally equal to the balance, at the end of the month, of unexpended amounts renounced multiplied by a rate. The rate is equal to 1/12 of the annual interest rate prescribed for the purposes of determining refund interest under subsection 164(3). However, if amounts remain unexpended at the end of the calendar year of renunciation, an extra tax of 1/10 of the unexpended amounts applies.

Subsection 211.91(2) contains the reporting and payment requirements for the tax under Part XII.6. It requires the return and payment to be made before March of the calendar year following the calendar year of renunciation.

COVID-19 – expenses deemed incurred earlier

In response to the COVID-19 pandemic, subsection 211.91(2.1) is introduced to provide relief in respect of flow-through share agreements entered into in 2019 and 2020.

Paragraph 211.91(2.1)(a) extends the filing and payment deadline in respect of Part XII.6 tax by one year.

Paragraph 211.91(2.1)(b) deems certain expenditures to be incurred earlier than they are actually incurred, in order to provide a reduction of the Part XII.6 tax that would otherwise be payable. Subparagraphs (i) and (ii) provide that, for expenses incurred in the calendar year (the "normal look-back year") following the calendar year in which a flow-through share agreement is entered into, the expenses are deemed to be incurred in January of the normal look-back year. Since Part XII.6 tax does not apply to the extent that amounts are expended in January of the normal look-back year, the result is that any amounts expended in the normal look-back year will be exempt from Part XII.6 tax.

Subparagraph 211.91(2.1)(b)(iii) provides that, for the purposes of applying Part XII.6 tax, expenses incurred in the calendar year following the normal look-back year are deemed to be incurred 12 months earlier than they are actually incurred. This subparagraph also ensures that the requirement in paragraph 66(12.66)(a) to incur expenditures in the calendar year of renunciation can be complied with where expenditures are incurred within 12 months of the end of the calendar year of renunciation.

Clause 52

Tax on income from Canada of non-resident persons

Section 212 of the Act provides rules for non-resident withholding tax.

Tax

Subsection 212(1) imposes a 25% income tax, commonly referred to as a "non-resident withholding tax" or "Part XIII tax", on certain payments to non-residents of Canada.

Subsection 212(1) is amended by adding new paragraph (l.1) to provide that payments made to a non-resident of Canada out of an advanced life deferred annuity are subject to this tax.

For more information on the rules that apply to advanced life deferred annuities, see the commentary on new section 146.5.

This amendment comes into force on January 1, 2020.

Exempt dividends

Subsection 212(2.1) exempts from Part XIII tax an amount paid or credited to a non-resident lender by a borrower under a securities lending arrangement if:

• the payment is deemed by existing subparagraph 260(8)(c)(i) to be a dividend;
• the borrowed security is a share of a non-resident corporation; and
• the securities lending arrangement was entered into by the borrower in the course of carrying on a business outside Canada.

The scope of this provision is broadened so as to exempt from Part XIII tax an amount paid or credited to a non-resident lender by a borrower under a securities lending arrangement or a specified securities lending arrangement if:

• the payment is deemed by new subparagraph 260(8)(a)(ii) to be a dividend;
• the borrowed security is a share of a non-resident corporation; and
• either
  • the arrangement is a fully collateralized arrangement; or
  • the borrower and the non-resident lender are dealing at arm's length.

  This amendment ensures that the only circumstances where a dividend compensation payment in respect of a share of a non-resident corporation is not exempted from Part XIII tax under subsection 212(2.1) is if the share is borrowed under a non-arm's length arrangement that is not a fully collateralized arrangement. In these circumstances, the dividend compensation payment is deemed to be a payment of interest made by the borrower to the non-resident lender under new paragraph 260(8)(c).

  For more information, see the commentary on the new definitions "fully collateralized arrangement" and "specified securities lending arrangement" in subsection 248(1), and new paragraphs 260(8)(a) and (c).

  This amendment applies to amounts paid or payable or credited after March 18, 2019.

  Interest – definitions

  Subsection 212(3) contains definitions that are applicable for the purposes of paragraph 212(1)(b). One of these definitions is that of "fully exempt interest". If an interest payment is fully exempt interest, then – provided it is not participating debt interest – it will not be subject to Part XIII tax under paragraph 212(1)(b) even if the payer and the recipient do not deal at arm's length.

  Paragraph (d) of the definition "fully exempt interest" currently includes an amount paid or payable or credited under a securities lending arrangement that is deemed by existing subparagraph 260(8)(c)(i) to be a payment made by the borrower to the non-resident lender of interest, if

  • the securities lending arrangement was entered into by the borrower in the course of carrying on a business outside of Canada; and
  • the borrowed security is described in paragraph (b) or (c) of the definition "qualified security" in subsection 260(1) and issued by a non-resident issuer.

  The scope of this provision is broadened to include amounts paid or credited under a securities lending arrangement or a specified securities lending arrangement, that are deemed by new subparagraph 260(8)(a)(i) to be payments made by a borrower to a lender of interest, if the arrangement is a fully collateralized arrangement, and

  • the following conditions are met:
    • the arrangement was entered by the borrower in the course of carrying on a business outside of Canada, and
    • the borrowed securities are described in paragraph (b) of the definition "qualified security" in subsection 260(1) and issued by a non-resident issuer;

    This amendment has three main objectives.

    First, it ensures that an interest compensation payment that qualified as fully exempt interest under existing paragraph (d) of the definition will continue to qualify under either new subparagraph (d)(i) or (d)(ii) of the definition.

    Second, it ensures that an interest compensation payment that was exempted from Part XIII tax under existing subparagraph 260(8)(c)(ii) will be similarly exempted under new subparagraph (d)(ii) of the definition.

    Third, it ensures that an interest compensation payment that qualified as fully exempt interest under paragraph (a) or (b) of the definition through the application of the "payable on the security" deeming rule under existing paragraph 260(8)(c), which has been eliminated under new subparagraph 260(8)(a)(i), will continue to qualify under new subparagraph (d)(iii) of the definition.

    For more information, see the commentary on the new definitions "fully collateralized arrangement" and "specified securities lending arrangement" in subsection 248(1), and new paragraph 260(8)(a).

    This amendment applies to amounts paid or payable or credited after March 18, 2019.

    Clause 53

    Foreign affiliate dumping – conditions for application

    Subsection 212.3(1) of the Act provides the conditions for the application of subsection 212.3(2), the main operative rule of the foreign affiliate dumping rules in section 212.3. In order for subsection 212.3(2) to apply to an investment in a non-resident corporation (referred to as the "subject corporation") by a corporation resident in Canada (referred to as the "CRIC"), paragraph 212.3(1)(a) generally requires that the subject corporation be a foreign affiliate of the CRIC or of a corporation that does not deal at arm's length with the CRIC (referred to as the "other Canadian corporation").

    Paragraph 212.3(1)(b) requires that the CRIC or the other Canadian corporation be controlled by a non-resident corporation (referred to as the "parent") immediately after the time of the investment, or become controlled by the parent after the time of the investment and as part of a transaction, event or series of transactions or events that includes the making of the investment.

    Paragraph 212.3(1)(b) is amended to expand the scope of application of the foreign affiliate dumping rules to where a CRIC (or an other Canadian corporation) is controlled by a non-resident individual (i.e., a natural person or a trust) or by a group of non-resident persons, each member of which does not deal at arm's length with the other members. Consequential on this change, the defined terms are modified such that, for the purposes of section 212.3, where there is a single non-resident person who controls the CRIC (or the other Canadian corporation), that non-resident person is referred to as the "parent"; and where the CRIC (or an other Canadian corporation) is controlled by a group of non-resident persons not dealing with each other at arm's length, and not by any single non-resident person, each group member is referred to as a "parent" and the group of non-residents is referred to as the "group of parents". It is intended that references to "parent" and "group of parents" include natural persons and trusts.

    Consequential on these amendments, subparagraph 212.3(1)(b)(i) is modified in two ways. First, the reference to "the parent" is replaced by "a parent". This ensures that, where there is a group of parents, the condition in subparagraph 212.3(1)(b)(i) is satisfied if its requirements are met in relation to any parent that is a member of the group of parents.

    Second, subparagraph 212.3(1)(b)(i) is modified by deleting a reference to "non-resident". This ensures that, in determining whether the 25-per-cent-of-equity threshold (measured by votes or value) under that provision is met, any shares of the CRIC (or other Canadian corporation) owned by a partnership whose members include any person that does not deal at arm's length with a parent – whether that person is resident in Canada or non-resident – is to be taken into consideration. For example, if a CRIC were controlled by a limited partnership, of which the general partner was a Canadian-resident corporation whose sole shareholder was a non-resident individual, the shares of the CRIC owned by the partnership would be taken into consideration for the purposes of determining whether the 25 per cent threshold in subparagraph 212.3(1)(b)(i) is satisfied.

    Foreign affiliate dumping – consequences

    Where the conditions in subsection 212.3(1) are satisfied, paragraph 212.3(2)(a) deems a CRIC to pay a dividend to the parent in an amount equal to the total of all amounts each of which is the portion of the fair market value of any property transferred, obligations assumed or incurred, or benefits otherwise conferred, by the CRIC, or any property transferred to the CRIC that results in the reduction of an amount owing to the CRIC, that can reasonably be considered to relate to the CRIC's investment in the subject corporation.

    Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of application of subsection 212.3(2) to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, paragraph 212.3(2)(a) is modified to ensure that, where the CRIC is controlled by a group, each member of the group is deemed to receive a dividend from the CRIC in an appropriate amount. More specifically, the amount that would have been the amount of the deemed dividend, had a single non-resident person controlled the CRIC, is allocated between the group members based on the relative fair market values of the shares of the CRIC that are held, directly or indirectly, by them.

    The amount of the dividend deemed to be paid by the CRIC to each parent is determined by the new formula A x B/C.

    Variable A, in effect, represents the amount that was, prior to these amendments the amount of the deemed dividend under paragraph 212.3(2)(a). Because both variables B and C are equal to one where there is only one parent, the amount determined by the formula will equal the amount determined for A where the CRIC is controlled by a single non-resident person.

    Where there is a group of parents, the fraction B/C represents the proportion that the fair market value of the shares of the CRIC that are held, directly or indirectly, by a parent is of the total fair market value of all shares of the CRIC that are held, directly or indirectly, by all parents among the group of parents.

    Dividend substitution election

    Subsection 212.3(3) is an elective rule that allows for all or a portion of a dividend that would otherwise be deemed under paragraph 212.3(2)(a) to be paid by the CRIC to the parent to instead be deemed to be paid by certain other Canadian-resident corporations in the corporate group (that are "qualifying substitute corporations", as defined by subsection 212.3(4)), to either the parent or another non-resident corporation in the group.

    Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, subsection 212.3(3) is modified to replace two references to "the parent" with "a parent". This ensures that a parent that is a member of a group of parents that controls the CRIC can file an election (jointly with the CRIC and any other relevant person) under subsection 212.3(3) in respect of the dividend that parent is otherwise deemed to receive from the CRIC under paragraph 212.3(2)(a).

    Subsection 212.3(3) is also amended such that a parent (jointly with the CRIC and any other relevant person) can elect to substitute, in place of that parent as the dividend recipient, only a non-resident person that is related to the parent. Prior to this amendment, the election allowed for any non-resident corporation that did not deal at arm's length with the parent to be so substituted.

    Definitions

    Subsection 212.3(4) sets out definitions that apply for the purposes of the foreign affiliate dumping rules in section 212.3.

    Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, the definitions "cross-border class", "dividend time" and "qualifying substitute corporation" are modified to replace references to "the parent" with "a parent", and certain references to "non-resident corporation" with "non-resident person"; and to add a reference to a "group of parents".

    Sequential investments – paragraph 212.3(10)(f)

    Subsection 212.3(5.1) ensures that, in certain circumstances where an indirect investment in a subject corporation is made after and as part of the same series of transactions or events as a direct investment in the subject corporation, paragraph 212.3(2)(a) does not cause a deemed dividend (or, in combination with subsection 212.3(7), a reduction of paid-up capital (PUC)) in respect of the indirect investment to the extent of the amount of the earlier direct investment.

    Consequential on the amendment to paragraph 212.3(2)(a) adding a formula to that paragraph, subsection 212.3(5.1) is modified to refer to the amount determined for A in that formula. For more information, see the commentary on paragraph 212.3(2)(a).

    Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, subsection 212.3(5.1) is also modified to include a reference to a "group of parents". For more information, see the commentary on paragraph 212.3(1)(b).

    Anti-avoidance rule – cross-border class

    Subsection 212.3(6) is an anti-avoidance rule that deems, in certain circumstances, a particular class of shares of a CRIC or a qualifying substitute corporation to not be a cross-border class in respect of an investment.

    Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, paragraph 212.3(6)(a) and clause 212.3(6)(a)(ii)(B) are modified to replace references to "the parent" with "a parent".

    Reduction of deemed dividend

    Subsection 212.3(7) provides rules that allow for dividends that are otherwise deemed to arise under paragraph 212.3(2)(a) to be offset against the PUC of the shares of the CRIC, or qualifying substitute corporations in respect of the CRIC, in certain circumstances.

    Consequential on the amendment to paragraph 212.3(2)(a) adding a formula to that paragraph to address cases where the CRIC is controlled by a group of parents, references in subsection 212.3(7) to the amount otherwise determined for the deemed dividend under paragraph 212.3(2)(a) are replaced with references to the amount determined for A in the formula in paragraph 212.3(2)(a). These amendments are intended to ensure that a given amount of PUC in respect of a cross-border class cannot be offset separately against multiple deemed dividends under paragraph 212.3(2)(a). For example, if a CRIC that is controlled by a group of parents is deemed by paragraph 212.3(2)(a) to pay a $100 dividend to each of its two parents (i.e., the amount determined for variable A in the formula in paragraph 212.3(2)(a) is $200), and the total PUC of cross-border classes in respect of the investment is equal to $100, the CRIC's PUC will effectively offset each parent's deemed dividend by $50.

    Consequential on the amendment to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, paragraph 212.3(7)(c) is also modified by replacing references to "the parent" and "non-resident corporations" with "parents" and "non-resident persons", respectively.

    Finally, paragraph 212.3(7)(d) is modified, consequential on the amendment to paragraph 212.3(1)(b), to replace references to "the parent" with "a parent" or "each parent".

    Pertinent loan or indebtedness

    Subsection 212.3(11) defines "pertinent loan or indebtedness" for the purposes of subsection 212.3(10).

    Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, paragraph 212.3(11)(c) is modified to replace the reference to "the parent" in the definition with "each parent". Thus, where the CRIC is controlled by a group of parents, the election under that paragraph must be made jointly by the CRIC and each parent.

    Control

    Subsection 212.3(15) provides special rules for determining control for the purposes of section 212.3 and paragraph 128.1(1)(c.3).

    Subparagraphs 212.3(15)(a)(i) and (ii) are generally relieving provisions. Subparagraph 212.3(15)(a)(i) prevents multiple dividends from being deemed under paragraph 212.3(2)(a) or 128.1(1)(c.3) in respect of an investment because more than one non-resident corporation in a corporate chain controls a CRIC or immigrating corporation (referred to as the "specific corporation"). Subparagraph 212.3(15)(a)(ii) provides relief where a specific corporation is controlled by a non-resident corporation that is ultimately controlled by a Canadian-resident corporation and not by a non-resident person.

    Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, subparagraph 212.3(15)(a)(i) is modified by replacing references to "non-resident corporation" with "non-resident person".

    The reference to control "by more than one non-resident person" in subparagraph 212.3(15)(a)(i) is not intended to describe a structure where a group of parents controls a specific corporation, but none of the group members controls the specific corporation individually. Rather, it describes where two or more non-resident persons simultaneously control the specific corporation, independently from one another, which generally occurs where one of the non-resident persons controls another non-resident person that controls the specific corporation.

    Also consequential on the amendments to paragraph 212.3(1)(b), clause 212.3(15)(a)(ii)(B) is amended to ensure that relief is not available under subparagraph 212.3(15)(a)(ii) where the Canadian-resident corporation (that controls the non-resident corporation that controls the specific corporation) is controlled by a group of non-resident persons that do not deal with each other at arm's length.

    Another amendment that is being made consequential on the amendments to paragraph 212.3(1)(b) is to replace paragraph 212.3(15)(b). The rule in paragraph 212.3(15)(b), prior to this amendment, was intended to ensure that the foreign affiliate dumping rules could not be avoided where a corporation is held through a related group of non-resident corporations, no one member of which owns shares having more than 50 per cent of the votes in respect of the corporation. This rule is no longer needed, since the amendments to paragraph 212.3(1)(b), among other things, extend the foreign affiliate dumping rules to CRICs that are controlled by a group of non-resident persons not dealing with each other at arm's length.

    The new paragraph 212.3(15)(b) rule addresses a different issue from the previous one. It ensures that a non-resident person is not considered to be a member of a group of non-resident persons not dealing with each other at arm's length that controls a CRIC, solely because the non-resident person controls another member of the group. Similar to subparagraph 212.3(15)(a)(i), this is intended to ensure, among other things, that deemed dividends are not inappropriately duplicated at multiple levels within an ownership chain.

    Exception – more closely connected business activities

    Subsection 212.3(16) provides an exception from the operative foreign affiliate dumping rule in subsection 212.3(2). The exception is intended to allow a CRIC to invest in foreign affiliates in certain circumstances where the CRIC is making a strategic acquisition of a business that is more closely connected to its business than to that of any non-resident corporation with which the CRIC does not deal at arm's length.

    Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, paragraph 212.3(16)(a) is modified to replace the reference to "non-resident corporation" with "non-resident person". This change expands, in certain cases, the businesses that must be taken into consideration in applying the "more closely connected business" test, to include business activities carried on by certain natural persons or trusts.

    Exception – corporate reorganizations

    Subsection 212.3(18) provides exceptions from the foreign affiliate dumping rules for various forms of corporate reorganizations and distributions that result in direct or indirect investments by a CRIC in a subject corporation.

    Amendments are made to subsection 212.3(18), consequential on the amendments to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length.

    Subparagraph 212.3(18)(a)(i) provides an exception for certain acquisitions of the shares or debt obligations of a subject corporation by a CRIC from another Canadian-resident corporation (referred to as the "disposing corporation"). Subparagraph 212.3(18)(a)(ii) is similar to subparagraph (a)(i) but applies in respect of acquisitions by a CRIC that is formed on the amalgamation, governed by subsection 87(1), of two or more Canadian-resident corporations.

    Both subparagraphs 212.3(18)(a)(i) and (ii) are amended in three main ways. First, some references to "non-resident corporation" are replaced with references to "non-resident person", reflecting the expanded scope of the foreign affiliate dumping rules as a result of the amendments to paragraph 212.3(1)(b).

    Second, subparagraphs 212.3(18)(a)(i) and (ii) are restructured, generally in order to "make room" for new sets of conditions applicable in the case where a CRIC is controlled by a group of parents rather than by one parent. These new conditions are in sub-clauses 212.3(18)(a)(i)(A)(II) and (B)(II), and (ii)(A)(II) and (B)(II).

    Third, the main substantive changes to subparagraphs 212.3(18)(a)(i) and (ii) are the new conditions for CRICs that are controlled by a group of parents. These new conditions parallel the existing conditions in those subparagraphs, which apply where the CRIC is controlled by one parent. In general terms, similar to the rules that apply for CRICs controlled by one parent, these new conditions are intended to limit the exceptions in subparagraphs 212.3(18)(a)(i) and (ii) to circumstances where the CRIC and the disposing corporation (or, in the case of an amalgamation, the predecessor corporations) – or the shareholders of the disposing corporation (or the predecessor corporations) – are controlled by the same group of parents throughout the series of transactions or events that includes the acquisition.

    Also consequential on the amendments to paragraph 212.3(1)(b), amendments are made to subparagraphs 212.3(18)(c)(i) and (ii) that are analogous to the amendments to subparagraph 212.3(18)(a)(i) and (ii), described above. Subparagraphs 212.3(18)(c)(i) and (ii) are almost identical to subparagraphs 212.3(18)(a)(i) and (ii), except that, whereas the latter deal with direct acquisitions by the CRIC of shares of the subject corporation, the former provide exceptions for internal reorganizations that involve an indirect acquisition of shares of a subject corporation by a CRIC resulting from the direct acquisition by the CRIC of shares of another corporation resident in Canada.

    Persons deemed not to be related

    Subsection 212.3(21) deems persons to not be related for the purposes of the reorganization exceptions in subsection 212.3(18), if it can reasonably be considered that one of the main purposes for one or more transactions or events was to cause those persons to be related in order to qualify for one of those exceptions.

    Consequential on the amendments to paragraph 212.3(1)(b) extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length, and the related amendments to subsection 212.3(18), subsection 212.3(21) is amended to deem a person or group of persons not to control another person if it can reasonably be considered that one of the main purposes for one or more transactions or events was to cause such control in order to qualify for an exception in subsection 212.3(18).

    Trusts

    New subsection 212.3(26) contains special rules for trusts, which are applicable for the purposes of subsection 17.1(1) (in respect of a pertinent loan or indebtedness, as defined in subsection 212.3(11)), paragraph 128.1(1)(c.3), section 212.3 and subsection 219.1(2). The rules in subsection 212.3(26) also apply for the purposes of paragraph 251(1)(a) as it applies in relation to the foregoing provisions.

    Subsection 212.3(26) is introduced in connection with the amendments to paragraph 212.3(1)(b) extending the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length.

    Paragraph 212.3(26)(a) sets out a number of assumptions for the purposes of determining whether persons (including trusts) are related to each other, or any person is controlled by any other person or group of persons. For these purposes, each trust is treated as a corporation having a single class of 100 voting shares. Ownership of those shares is allocated to the beneficiaries under the trust in accordance with their proportionate interests (based on fair market value) in the trust.

    One consequence of paragraph 212.3(26)(a), among others, is that, where a CRIC is controlled by a Canadian-resident trust in which a non-resident person has a majority interest (determined based on fair market value), that non-resident person will be considered to control the CRIC.

    Because the rules in subsection 212.3(26) apply for the purposes of paragraph 251(1)(a), generally as it applies for the purposes of the rules relating to foreign affiliate dumping, any persons that are related to each other based on the assumptions in paragraph 212.3(26)(a) are deemed by paragraph 251(1)(a) to not deal at arm's length for these purposes. This result can be relevant, for example, in determining whether, for the purpose of paragraph 212.3(1)(b), members of a group of non-resident persons that controls the CRIC deal with each other at arm's length.

    Paragraph 212.3(26)(b) provides a "look-through" rule that applies where a Canadian-resident trust owns shares of a corporation. In those circumstances, paragraph 212.3(26)(b) deems each beneficiary under the trust to own, and the trust not to own, a number of shares of each class of the corporation in accordance with the beneficiary's proportionate interest (based on fair market value) in the trust.

    Paragraph 212.3(26)(b) applies exclusively for the purpose of determining the number of shares of a corporation that are owned by beneficiaries under a trust and, in contrast with paragraph 212.3(26)(a), is not intended to apply for the purpose of determining whether persons are related or if one person controls another. Paragraph 212.3(26)(b) is intended to integrate the rule in paragraph 212.3(26)(a) with the PUC offset rules in subsections 212.3(6) and (7) and related definitions in subsection 212.3(4). Absent paragraph 212.3(26)(b), where paragraph 212.3(26)(a) causes a non-resident person that is a beneficiary under a Canadian-resident trust to be a parent in respect of a CRIC (the shares of which are owned by the trust), the non-resident person would not meet the conditions in the definition "cross-border class" or the conditions in subsection 212.3(7), and thus could not offset the PUC of any class of shares of the CRIC against a deemed dividend under paragraph 212.3(2)(a).

    Paragraph 212.3(26)(c) is an anti-avoidance rule in respect of discretionary trusts, which applies for the purposes of both paragraphs 212.3(26)(a) and (b). It treats a discretionary beneficiary as though it held a 100 per cent interest in the trust for the purposes of applying paragraphs 212.3(26)(a) and (b), if:

    • the beneficiary's share of the income or capital of the trust depends on the exercise by any person of, or the failure by any person to exercise, any discretionary power; and
    • it can reasonably be considered that one of the main reasons for the discretionary power is to avoid or limit the application of paragraph 128.1(1)(c.3), subsection 212.3(2) or subsection 219.1(2).

    Paragraph 212.3(26)(c) reflects a general policy concern regarding the reliance by taxpayers on discretionary or similar interests to avoid certain tax consequences, such as those flowing from paragraph 212.3(26)(a) or (b) (e.g., by taking the position that the fair market value of the interest of a beneficiary under a trust is nil or nominal because it is subject to a discretionary power).

    The amendments to section 212.3 apply in respect of transactions or events that occur after March 18, 2019.

    Clause 54

    Foreign affiliate dumping – emigrating corporation

    Subsection 219.1(2) of the Act applies where any shares of an emigrating corporation are owned by a Canadian-resident corporation that is controlled by a non-resident corporation and the emigrating corporation is a foreign affiliate of that Canadian-resident corporation immediately after the emigration. In these circumstances, any PUC of the shares of the emigrating corporation is deemed to be nil.

    To better align with paragraph 212.3(1)(b) – following the amendments to that paragraph extending the scope of the foreign affiliate dumping rules to CRICs that are controlled by a non-resident individual or a group of non-resident persons not dealing with each other at arm's length – subsection 219.1(2) is amended to require that the emigrating corporation be controlled by a non-resident person or a group of non-resident persons not dealing with each other at arm's length.

    This amendment applies in respect of transactions or events that occur after March 18, 2019.

    Clause 55

    Requirement to provide documents or information

    Subsection 231.2(1) of the Act provides that, notwithstanding any other provision of the Act, the Minister of National Revenue may by notice require that any person provide information or any document for any purpose relating to the administration or enforcement of the Act. An exception is made where the information or document relates to an unnamed person or persons, in which case the procedure set out in subsections 231.1(2) to (6) must be followed.

    Subsection 231.2(1) is amended by moving the methods by which a notice referred to in this subsection must be sent or served to new subsection 231.2(1.1).

    Notice

    New subsection 231.2(1.1) sets out the manner in which a notice referred to in subsection 231.2(1) may be provided to a person. In addition to personal service and to registered or certified mail, which were already provided for under subsection 231.2(1) prior to this amendment, this subsection provides that a notice may be sent electronically to a bank or credit union. In order for a notice to be sent electronically, the bank or credit union must first have provided written consent.

    Clause 56

    Requirement to provide foreign-based information

    Subsection 231.6(2) of the Act provides that, notwithstanding any other provision of the Act, a person resident in Canada or a non-resident person carrying on business in Canada must provide, when required by notice of the Minister of National Revenue, any foreign-based information or document.

    Subsection 231.6(2) is amended by moving the methods by which a notice referred to in this subsection must be sent or served to new subsection 231.6(3.1).

    Notice

    New subsection 231.6(3.1) sets out the manner in which a notice referred to in subsection 231.6(2) may be provided to a person resident in Canada or to a non-resident person carrying on business in Canada. In addition to personal service and to registered or certified mail, which were already provided for under subsection 231.6(2) prior to this amendment, this subsection provides that a notice may be sent electronically to a bank or credit union. In order for a notice to be sent electronically, the bank or credit union must first have provided written consent.

    Review of foreign information requirement

    Subsection 231.6(4) permits the person who is provided with a notice referred to in subsection 231.6(2), within 90 days of the provision thereof, to apply to a judge for a review of the requirement to provide the foreign-based information or document.

    The English version of subsection 231.6(4) is amended to add references to the sending of a notice in addition to the serving of a notice. This amendment is consequential on the addition of subsection 231.6(3.1).

    Unreasonableness

    Subsection 231.6(6) contains a limitation in determining the reasonableness of a requirement for the purposes of paragraph 231.6(5)(c), which sets out the powers of a judge on hearing an application for review under subsection 231.6(4). A requirement is not to be considered unreasonable where the foreign-based information or document being sought is under the control of or available to a related non-resident person merely because that person is not controlled by the person provided with the notice under subsection 231.6(2).

    The English version of subsection 231.6(6) is amended to add a reference to the sending of a notice in addition to the serving of a notice. This amendment is consequential on the addition of subsection 231.6(3.1).

    Consequence of failure

    Subsection 231.6(8) sets out the consequences to a person of failing to comply with a requirement under section 231.6. Failure to provide substantially all information or documents required may result in a prohibition on the introduction into evidence of any such information or document in a civil proceeding relating to the administration or enforcement of the Act.

    Subsection 231.6(8) is amended to add a reference to the sending of a notice in addition to the serving of a notice. This amendment is consequential on the addition of subsection 231.6(3.1).

    The French version of subsection 231.6(8) is also amended to align the French and English versions of the Act. The references to "requirement" ("mise en demeure") are replaced with references to "notice" ("avis").

    Clause 57

    Time period not to count

    Section 231.8 of the Act provides that the period of time that elapses between the filing of the application for review of a requirement for information, or the filing of a notice of appearance (or otherwise challenging the application for a compliance order), and the time either the application for judicial review or the application to obtain the compliance order is finally disposed of, as the case may be, does not count toward the statutory limit for making tax assessments.

    Paragraph 231.8(a) is amended to replace the reference to "served" with a reference to "sent or served with". This amendment is consequential on the addition of subsection 231.2(1.1).

    Clause 58

    Information may be communicated

    Subsection 241(3.4) of the Act provides that the Minister of National Revenue is permitted to publish the names of qualified Canadian journalism organizations in respect of which a taxpayer can be entitled to a deduction under the digital news subscription tax credit.

    Subsection 241(3.4) is amended to provide that the Minister is also permitted to publish information relating to the eligibility of subscriptions provided by those organizations.

    These amendments come into force on January 1, 2020.

    Clause 59

    Proof of electronic delivery

    Subsections 244(5) and (6) of the Act contain rules for what is to be considered evidence of personal service or sending by mail.

    New subsection 244(6.1) provides rules for what is to be considered evidence that a notice was sent electronically to a person. This amendment is consequential on the addition of subsection 231.2(1.1). For more information, see the commentary on that subsection.

    Clause 60

    Transfer pricing – order of application

    Subsection 247(2) of the Act sets out the adjustment required for tax purposes to ensure that non-arm's length parties conduct their transactions under terms and conditions that would have prevailed if the parties had been dealing at arm's length, as well as the conditions under which such an adjustment is to be made.

    The mid-amble to subsection 247(2) currently has three main components:

    • a requirement to identify any amounts that, but for sections 245 and 247, would be determined for the purposes of the Act in respect of the taxpayer or the partnership for a taxation year or fiscal period;
    • the determination of what the amounts would have been if the relevant assumptions in paragraph (c) or (d) were true; and
    • the requirement to adjust the first amounts to the quantum or nature of the amounts in the second bullet.

    Subsection 247(2) is amended to clarify that the adjustment, if any, under subsection 247(2) is made to amounts as they are stated by the taxpayer or partnership before modification by the application of the other provisions of the Act, that is, other than subsection 247(2) and, for greater certainty, section 245.

    Subsection 247(2) is also amended to define the first reference to "amounts" in the mid-amble of the subsection (i.e., the amounts described in the first bullet above) as the "initial amounts" and to define the second reference to "amounts" (i.e., the amounts described in the second bullet above) as the "adjusted amounts". These two terms are used in new subsection 247(2.1).

    For clarity, subsection 247(2) is also amended to restate the condition "but for this section and section 245" as "if this Act were read without reference to this section and section 245" and to move that condition after the statement "would be determined for the purposes of applying the provisions of this Act". The reference to section 247 is intended to prevent the following circularity: once the initial amounts are adjusted to the adjusted amounts, those adjusted amounts could be considered amounts determined for the purposes of applying the provisions of the Act, but it does not make sense that they be considered initial amounts that must themselves be adjusted. The reference to section 245 is for greater certainty and is consistent with the general anti-avoidance rule in section 245 applying only if there would be a tax benefit (as that term is defined in subsection 245(1)) but for section 245.

    These amendments applies to taxation years that begin after March 18, 2019.

    Ordering

    Subsection 247(2.1) is added in order to clarify the interaction of subsection 247(2) and the other provisions of the Act. The subsection provides an ordering for the application of the transfer pricing adjustments in the context of the provisions of the Act.

    Paragraph 247(2.1)(a) provides that where the conditions in the opening words of subsection (2) and its paragraph (a) or (b) are met, a taxpayer or partnership is first required to determine each of the amounts (referred to in subsection 247(2) as the "initial amounts") that would be determined for the purposes of applying the provisions of the Act if the Act were read without reference to section 247 and 245.

    Paragraph 247(2.1)(b) then provides that the quantum or nature of the initial amounts are adjusted to give rise to the amounts referred to in subsection 247(2) as the "adjusted amounts". These are the amounts that would be determined if the assumptions in paragraph 247(2)(c) or (d), as the case may be, were true.

    Lastly, paragraph 247(2.1)(c) provides that each of the provisions of the Act, other than subsection 247(2) and, for greater certainty, including the general anti-avoidance rule in section 245, are to be applied using the adjusted amounts. This ensures that the rule embodying the arm's length principle is a rule of general application.

    Example 1 – application of subsections 247(2) (transfer pricing adjustment) and 18(4) (limitation on deduction of interest)

    In a taxation year, a corporation resident in Canada has a debt owing to a non-arm's length non-resident corporation of $1,000 that is the sole debt included in the corporation's outstanding debts to specified non-residents (as defined in subsection 18(5)). The applicable annual interest rate on that debt is 10%. Accordingly, interest of $100 is payable under the terms of the debt obligation in the taxation year. The corporation has an equity amount (as defined in subsection 18(5)) of $600. The interest rate that would have been agreed to had the parties been dealing at arm's length is 7%.

    The conditions in the opening words of subsection 247(2) and its paragraph (a) are met. New subsection 247(2.1) then provides rules for making the adjustment under subsection 247(2) in the context of the other provisions of the Act, such as subsection 18(4).

    Paragraph 247(2.1)(a) requires a determination of each of the "initial amounts" that would be determined for the purposes of applying the provisions of the Act. In this case, the "initial amounts" would include the $100 of interest.

    Paragraph 247(2.1)(b) then requires that the adjustments under subsection 247(2) be made to each of the initial amounts. Since it is assumed in this example that only paragraph 247(2)(a) applies, the initial amount is to be adjusted to the amount that would be determined if the assumptions in paragraph 247(2)(c) were true. The $100 of interest payable in the taxation year would therefore be adjusted to reflect the 7% arm's length rate of interest (i.e., the adjustment under subsection 247(2) is $30).

    Paragraph 247(2.1)(c) provides that each other provision of the Act is then to be applied using the adjusted amounts. This would include subsection 18(4) in this case, which generally prevents a corporation or trust from deducting interest on debts owing to certain specified non-residents to the extent that the debt owing to such non-residents exceeds a 1.5-to-1 debt-to-equity ratio. Applying the calculation in subsection 18(4) to the current facts, $7 of the $70 adjusted amount of interest would be denied (i.e., $70((1,000 – 600 x 1.5)/1,000)).

    The effect of new subsection 247(2.1) is to clarify that the adjustment under subsection 247(2) is made before the application of subsection 18(4). The limitation, if any, pursuant to subsection 18(4) on the interest otherwise deductible in computing income is then computed with reference to the arm's length amount of interest determined pursuant to subsection 247(2).

    Example 2 – application of subsection 247(2) (transfer pricing adjustment) and section 17 (amount owing by non-resident)

    Throughout a taxation year, a non-resident (Forco) owes an amount of $100 to a corporation resident in Canada (Canco). Canco does not deal at arm's length with Forco and Forco is not a controlled foreign affiliate for the purpose of section 17. Interest at a rate of 1% is payable on the loan. The interest rate that would have been agreed to had the parties been dealing at arm's length is 3%.

    The conditions in the opening words of subsection 247(2) and its paragraph (a) are met. New subsection 247(2.1) then provides rules for making the adjustment under subsection 247(2) in the context of the other provisions of the Act, such as subsection 17(1). Where subsection 17(1) applies (i.e., because the conditions in subsection 17(1.1) are met), a corporation must include in computing its income for a taxation year an amount determined under the formula in that subsection.

    Paragraph 247(2.1)(a) requires a determination of each of the "initial amounts" that would be determined for the purposes of applying the provisions of the Act. In this case, the initial amounts would include the $1 of interest on the loan.

    Paragraph 247(2.1)(b) then requires that the adjustments under subsection 247(2) be made to each of the initial amounts. Since it is assumed in this example that only paragraph 247(2)(a) applies, the initial amount is to be adjusted to the amount that would be determined if the assumptions in paragraph 247(2)(c) were true. The amount corresponding to the use of a 1% rate of interest would therefore be adjusted to reflect the 3% arm's length rate of interest (i.e., the adjustment under subsection 247(2) is $2).

    Paragraph 247(2.1)(c) provides that each other provision of the Act is then to be applied using the adjusted amounts. This could include subsection 17(1), if the conditions in subsection 17(1.1) are met. However, based on the assumption that a 3% rate of interest is reasonable, the condition in paragraph 17(1.1)(c) would not be met and subsection 17(1) would not apply.

    This amendment applies to taxation years that begin after March 18, 2019.

    Provisions not applicable

    Subsection 247(8) is repealed, consequential on the introduction of new subsection 247(2.1).

    This amendment applies to taxation years that begin after March 18, 2019.

    Clause 61

    Definitions

    Subsection 248(1) of the Act provides a number of definitions that apply for all purposes of the Act.

    "derivative forward agreement"

    A derivative forward agreement essentially combines a derivative financial instrument with the purchase or sale of a capital property. Income from a derivative financial investment is generally fully taxable as ordinary income. Derivative forward agreements are typically used in an attempt to convert this fully taxable derivative income to a capital gain, only half of which is included in income. A derivative forward agreement therefore involves the purchase or sale of a capital property.

    Paragraph (a) of the definition "derivative forward agreement" in subsection 248(1) requires that the term of the agreement exceed 180 days or the agreement be part of a series of agreements with a term that exceeds 180 days.

    Paragraph (b) of the definition deals with agreements to purchase a capital property. In order for a purchase agreement to be a derivative forward agreement, the economic return on the agreement must have a derivative component. The economic return under such a purchase agreement is the difference between the price paid for the property and the fair market value of the property when it is delivered. If the agreement is a derivative forward agreement, this return will be included (or potentially deducted if there is a loss) in computing the taxpayer's income under paragraph 12(1)(z.7) (or paragraph 20(1)(xx)).

    For the purpose of determining whether the return has a derivative component, the return must be attributable, in whole or in part, to an underlying interest that is not described in subparagraph (b)(i), (ii) or (iii) of the definition.

    Subparagraph (b)(i) of the definition essentially provides that, where the return on the purchase is based on the economic performance of the property being purchased, the purchase agreement will not be a derivative forward agreement. This exception is intended to exclude certain commercial transactions (e.g., merger and acquisition transactions) from the scope of the definition.

    This exception in subparagraph (b)(i) of the definition has been misused to achieve the same unintended tax benefits as those realized by the derivative forward agreements initially targeted by the definition. Therefore, the scope of this exception is amended to narrow its application.

    New clauses (b)(i)(A) to (C) of the definition contain the conditions under which the exception is not available. The conditions are the following:

    • the property is a Canadian security (as defined in subsection 39(6)) or an interest in a partnership the fair market value of which is derived, in whole or in part, from a Canadian security;
    • the purchase agreement is an agreement to acquire property from a tax-indifferent investor or a financial institution (as defined in subsection 142.2(1)); and
    • it can reasonably be considered that one of the main purposes of the series of transactions or events, or any transaction or event in the series, of which the purchase agreement is part, is for all or any portion of the capital gain on a disposition (other than a disposition by the seller to the taxpayer under the agreement) of a Canadian security (referred to in the first bullet) – as part of the same series of transactions or events – to be attributable to amounts paid or payable on the Canadian security by the issuer of the Canadian security during the term of the purchase agreement as interest, dividend, or income of a trust other than income paid out of the taxable capital gains of the trust.

    This amendment comes into force on March 19, 2019.

    "qualified Canadian journalism organization"

    The definition "qualified Canadian journalism organization" is relevant for a number of provisions in the Act, including the definition "qualifying journalism organization" in section 149.1, section 125.6 (the refundable tax credit for journalism organizations) and section 118.02 (the non-refundable tax credit for subscriptions to Canadian digital news).

    The definition "qualified Canadian journalism organization" currently provides that a qualified Canadian journalism organization must be primarily engaged in the production of original news content. The definition is amended to remove this requirement and instead require that the organization be engaged in the production of original news content. For more information, see the consequential amendments to sections 149.1, 125.6 and 118.02.

    The definition "qualified Canadian journalism organization" is also amended to remove the requirement that the organization not be significantly engaged in the production of content to promote goods or services.

    These amendments come into force on January 1, 2019.

    "tax-indifferent investor"

    A "tax-indifferent investor" is generally defined in subsection 248(1) as meaning a person or partnership that is:

    • a person exempt from tax under section 149;
    • a non-resident person, other than a person to which all amounts paid or credited under a synthetic equity arrangement or a specified synthetic equity arrangement may be attributed to the business carried on by the person in Canada through a permanent establishment;
    • a trust resident in Canada (other than a specified mutual fund trust) if any of the interests as a beneficiary under the trust is not a fixed interest in the trust; or
    • in certain cases, a trust or partnership of which persons in the first three bullets are, directly or indirectly, beneficiaries or members.

    Consequential on the amendment of the exception in subparagraph (b)(i) of the definition "derivative forward agreement" in subsection 248(1), paragraph (b) of the definition "tax-indifferent investor" is amended to exclude a non-resident person to which all amounts paid or credited under a derivative forward agreement may be attributed to the business carried on by the person in Canada through a permanent establishment.

    For more information, see the commentary on the definition "derivative forward agreement" in subsection 248(1).

    This amendment comes into force on March 19, 2019.

    "zero-emission vehicle"

    The definition "zero-emission vehicle" in subsection 248(1) describes a class of assets that, if they are acquired and become available for use after March 18, 2019 and before 2028, are eligible for a temporary first-year enhanced capital cost allowance (CCA), subject to certain conditions. Zero-emission vehicles are included in either Class 54 or Class 55 of Schedule II to the Income Tax Regulations.

    Paragraph (c) of the definition currently requires that, prior to its acquisition by the taxpayer, the vehicle not have been used, or acquired for use, for any purpose. Furthermore, no CCA or terminal loss may have been claimed in respect of the vehicle by another person or partnership.

    For vehicles acquired after March 1, 2020, paragraph (c) of the definition is amended in two respects. First, the prior usage restriction is being removed. Second, the automatic disqualification of a vehicle in respect of which CCA or a terminal loss has been claimed is being removed and replaced with a rule, in new paragraph (d), that mirrors the restrictions for "accelerated investment incentive property" in subsection 1104(4) of the Income Tax Regulations.

    Thus for vehicles acquired after March 1, 2020, paragraph (d) provides that a vehicle may still qualify as a "zero-emission vehicle" where the vehicle was subject to a prior CCA or terminal loss claim provided that the vehicle was neither acquired by the taxpayer on a tax-deferred "rollover" basis nor was it previously owned or acquired by the taxpayer or a non-arm's length person or partnership.

    "advance life deferred annuity"

    Subsection 248(1) is amended to add the definition "advanced life deferred annuity", so that the definition of that term in new section 146.5(1) applies for the purposes of the Act.

    This amendment comes into force on January 1, 2020.

    "fully collateralized arrangement"

    Subsection 248(1) is amended to add the definition "fully collateralized arrangement". This definition largely parallels the "fully collateralized" test used in existing subparagraph 260(8)(c)(i). This definition is relevant for the purposes of subsection 212(2.1), paragraph (d) of the definition "fully exempt interest" in subsection 212(3), new paragraph 260(8)(c) and new subsection 260(8.3).

    This amendment comes into force on March 19, 2019.

    "specified securities lending arrangement"

    Subsection 248(1) is amended to add the definition "specified securities lending arrangement". This term is defined to have the meaning assigned in subsection 260(1). This definition is relevant for the purposes of subsection 212(2.1), paragraph (d) of the definition "fully exempt interest" in subsection 212(3) and new subsections 260(1.2), (8), (8.1), (8.2), (8.3) and (9.1).

    This amendment comes into force on March 19, 2019.

    Clause 62

    Person deemed resident (basic personal amount)

    Under paragraph 250(1)(f) of the Act, children who are dependent on certain persons deemed to be resident in Canada, and whose incomes do not exceed the amount of income that can be earned on a tax-free basis (i.e., the basic personal amount), are also deemed to be Canadian residents.

    Consequential on the introduction of the basic personal amount computation in new subsection 118(1.1), paragraph 250(1)(f) is amended to refer to the unreduced maximum amount determined under subsection 118(1.1) (i.e., the amount determined for F in that subsection).

    For more information on the computation of the new basic personal amount, see the commentary on new subsection 118(1.1).

    This amendment applies to the 2020 and subsequent taxation years.

    Clause 63

    Extended meaning of "spouse" and "former spouse"

    Subsection 252(3) of the Act extends the meaning of the terms "spouse" and "former spouse" to include, for a number of purposes of the Act, a party to a void or voidable marriage.

    Consequential on the introduction of advanced life deferred annuities under new section 146.5, which includes certain benefits payable to an annuitant's spouse after the death of the annuitant, subsection 252(3) is amended so that it applies for the purposes of section 146.5.

    This amendment comes into force on January 1, 2020.

    Clause 64

    Securities lending arrangements

    Section 260 of the Act provides rules for securities lending arrangements.

    References – borrower and lender

    Subsection 260(1.2) provides that for the purposes of subsections 260(8), (8.1), (8.2), (8.3) and (9.1) and subsections 212(2.1) and (3), in respect of a specified securities lending arrangement, a reference to a borrower includes a transferee and a reference to a lender includes a transferor.

    This amendment comes into force on March 19, 2019.

    Non-resident withholding tax

    Subsection 260(8) contains special rules that determine the character of an amount paid or credited under a securities lending arrangement by a borrower to a non-resident lender for the purposes of Part XIII tax.

    In general terms, paragraph 260(8)(a) provides that any amount paid or credited as compensation for any interest or dividend paid in respect of the security is deemed to be a payment of interest made by the borrower to the lender. However, if the arrangement is fully collateralized, subparagraph 260(8)(c)(i) provides that any such amount is, to the extent of the interest or dividend paid in respect of the security, deemed to be a payment made by the borrower to the non-resident lender of interest or dividend, as the case may be, payable on the security. For the purposes of subparagraph 260(8)(c)(i), the arrangement is fully collateralized if, throughout the term of the securities lending arrangement, the borrower has provided to the lender money or government debt obligations with a value of not less than 95% of the fair market value of the borrowed security. To meet this "fully collateralized" test, the borrower must also be entitled to enjoy the benefits of all or substantially all income derived from, and opportunity for gain with respect to, the money or government debt obligations provided.

    When the borrowed security is a qualified trust unit, paragraph 260(8)(b) provides that any amount paid or credited in respect of the security is deemed, to the extent of the amount of the underlying payment to which the compensation payment relates, to be an amount paid by the trust and having the same character and composition as the underlying payment.

    Finally, paragraph 260(8)(d) provides that any amount paid or credited as, on account of, in lieu of payment of or in satisfaction of a fee for the use of the security is deemed to be a payment of interest made by the borrower to the user.

    Subsection 260(8) is amended in a number of respects.

    First, its preamble is amended so that it applies to an amount paid or credited under a specified securities lending arrangement as well as under a securities lending arrangement. This ensures that amounts paid or credited under arrangements that are substantially similar to those that fall with the definition "securities lending arrangement" are subject to the same Part XIII tax treatment applicable to those arrangements.

    Second, existing subparagraph 260(8)(c)(i) is renumbered as new paragraph 260(8)(a), its "fully collateralized" test is eliminated and new paragraph 260(8)(a) becomes the main characterization rule in subsection 260(8).

    New paragraph 260(8)(a) provides that any amount paid or credited as compensation for any interest or dividend paid in respect of a security that is not a qualified trust unit is, subject to new paragraph 260(8)(c), deemed

    • to the extent of the amount of the interest paid in respect of the security, to be a payment made by the borrower to the lender of interest; and
    • to the extent of the amount of the dividend paid in respect of the security, to be a payment made by the borrower, as a corporation, to the lender of a dividend payable on the security.

    Under new subparagraph 260(8)(a)(i), any interest compensation payment made in respect of a security will be deemed to be a payment of interest, but this payment, in contrast to what occurs under existing subparagraph 260(8)(c)(i), will not be deemed to be payable on the security.

    Under new subparagraph 260(8)(a)(ii), any dividend compensation payment made in respect of a share of a Canadian resident corporation will always be treated as having the character of a dividend for the purposes of Part XIII, whether or not the arrangement is a fully collateralized arrangement.

    Third, the exemption under existing subparagraph 260(8)(c)(ii) for interest compensation payments made in respect of a borrowed Canadian or foreign government debt obligation is essentially moved to new subparagraph (d)(ii) of the definition "fully exempt interest" in subsection 212(3).

    Fourth, existing paragraph 260(8)(a) is renumbered as new paragraph 260(8)(c) and the scope of this provision is considerably narrowed.

    The original policy objective of existing paragraph 260(8)(a) was to prevent a borrower from avoiding or reducing the Part XIII interest withholding tax that would have otherwise applied on a cross-border borrowing by instead effectively obtaining cross-border financing through the guise of a securities lending arrangement that is not "fully collateralized".

    However, when the borrower and the non-resident lender are dealing at arm's length, this concern is generally no longer present. As of 2008, arm's length interest payments, except for participating debt interest, are exempt from Part XIII tax. Accordingly, there is no longer an incentive for arm's length parties to use a securities lending arrangement as a disguised financing.

    When the borrower and the non-resident lender are not dealing at arm's length, existing paragraphs 260(8)(a) and (c) essentially provide that any deemed interest payment made under a securities lending arrangement is not deemed to be payable on the borrowed security unless the arrangement is "fully collateralized". This is intended to prevent such a deemed interest payment from qualifying for any withholding tax exemption that is dependent on the underlying nature of the borrowed security in circumstances when the arrangement is a disguised financing. A similar result is now effected through new subparagraph 260(8)(c)(i) in conjunction with new subparagraph (d)(iii) of the definition "fully exempt interest" in subsection 212(3).

    In the end, new paragraph 260(8)(c) is limited to providing that any amount paid or credited as a compensation payment is deemed to be an interest payment, if:

    • the borrowed security is a share of a non-resident corporation;
    • the borrower and the lender are not dealing at arm's length; and
    • the arrangement is not a fully collateralized arrangement.

    For more information, see the commentary on subsection 212(2.1), paragraph (d) of the definition "fully exempt interest" in subsection 212(3) and the new definitions "fully collateralized arrangement" and "specified securities lending arrangement" in subsection 248(1).

    These amendments apply in respect of amounts paid or credited as SLA compensation payments after March 18, 2019. However, the amendments do not apply in respect of amounts paid or credited as SLA compensation payments after March 18, 2019 and before October 2019, if they are pursuant to a written arrangement entered into before March 19, 2019.

    Deemed fee for borrowed security

    Subsection 260(8.1) provides that, where a non-resident lender has received money as collateral or consideration for a loaned security and the borrower has not paid a reasonable fee for the use of the security, the borrower is deemed to have paid to the non-resident lender a borrow fee for the use of the security. This borrow fee is equal to the difference between interest on money held by the non-resident lender, calculated at a prescribed rate, and any amount paid to the borrower by the non-resident lender other than as a return of the collateral or consideration.

    Subsection 260(8.1) is amended to ensure that it appropriately applies in the context of a specified securities lending arrangement.

    For more information, see the commentary on the new definition "specified securities lending arrangement" in subsection 248(1).

    This amendment applies in respect of amounts paid or credited as SLA compensation payments after March 18, 2019. However, the amendment does not apply in respect of amounts paid or credited as SLA compensation payments after March 18, 2019 and before October 2019, if they are pursuant to a written arrangement entered into before March 19, 2019.

    Effect for tax treaties – interest

    Subsection 260(8.2) provides that any amount paid or credited under a securities lending arrangement by a borrower to a non-resident lender, that is deemed by existing paragraph 260(8)(a), (b) or (d) to be a payment of interest, is deemed for the purposes of any tax treaty not to be payable on or in respect of the security. The only circumstances where subsection 260(8.2) does not deem the interest compensation payment not to be payable on the security for treaty purposes is when existing paragraph 260(8)(c) applies and the arrangement is therefore "fully collateralized".

    Subsection 260(8.2) is amended to ensure that this result continues to be achieved even though the "payable on the security" deeming rule has been eliminated under new paragraph 260(8)(a). Specifically, subsection 260(8.2) is amended to provide that in applying new subparagraph 260(8)(a)(i), if a securities lending arrangement or specified securities lending arrangement is a fully collateralized arrangement, any interest compensation payment is deemed for the purposes of any tax treaty to be payable on the security.

    For more information, see the commentary on the new definitions "fully collateralized arrangement" and "specified securities lending arrangement" in subsection 248(1), and new paragraph 260(8)(a).

    This amendment applies in respect of amounts paid or credited as SLA compensation payments after March 18, 2019. However, the amendment does not apply in respect of amounts paid or credited as SLA compensation payments after March 18, 2019 and before October 2019, if they are pursuant to a written arrangement entered into before March 19, 2019.

    Effect for tax treaties – dividend

    New paragraphs 260(8.3)(a) and (b), when applied together, are intended to ensure that the same dividend withholding tax rate under a tax treaty applies to a dividend compensation payment made to a non-resident lender as to a dividend that would have been paid to that non-resident had it continued to hold the lent share of a Canadian-resident corporation.

    The effect of new paragraph 260(8.3)(c) is generally to prevent a non-resident lender from obtaining the benefit of the lowest treaty-reduced dividend withholding tax rate on a dividend compensation payment if:

    • the securities lending arrangement or the specified securities lending arrangement is not a fully collateralized arrangement; and
    • the borrower and the non-resident lender are not dealing at arm's length.

    For more information, see the commentary on subsection 212(2.1), and the new definition "specified securities lending arrangement" in subsection 248(1).

    This amendment applies in respect of amounts paid or credited as SLA compensation payments after March 18, 2019. However, the amendment does not apply in respect of amounts paid or credited as SLA compensation payments after March 18, 2019 and before October 2019, if they are pursuant to a written arrangement entered into before March 19, 2019.

    Non-arm's length compensation payment

    Subsection 260(9.1) deems a non-resident lender not to be dealing at arm's length with a person that is deemed by subsection 260(8) to have made a payment of interest to the non-resident lender if the non-resident lender is not dealing at arm's length with either the borrower or the issuer of the borrowed security, or both.

    Subsection 260(9.1) is amended to ensure that it appropriately applies in the context of a specified securities lending arrangement.

    For more information, see the commentary on the new definition "specified securities lending arrangement" in subsection 248(1).

    This amendment applies in respect of amounts paid or credited as SLA compensation payments after March 18, 2019. However, the amendment does not apply in respect of amounts paid or credited as SLA compensation payments after March 18, 2019 and before October 2019, if they are pursuant to a written arrangement entered into before March 19, 2019.

    Amendments to the Excise Tax Act (ETA)

    Clause 65

    Provision of documents may be required

    Subsection 99(1) of the ETAprovides that, subject to section 102.1 of the ETA, the Minister of National Revenue may, by a notice served personally or by registered or certified mail, require that any person provide any book, record, writing or other document or any information or further information for any purpose relating to the administration or enforcement of a listed international agreement (as defined in section 2 of the ETA) or relating to the administration or enforcement of the ETA. An exception is made where the information or document relates to an unnamed person or persons, in which case the procedure set out in section 102.1 must be followed.

    Subsection 99(1) is amended so that a notice under that subsection is to be served or sent in accordance with new subsection 99(1.1). In addition to the existing methods of service, subsection 99(1.1) allows the Minister to send such notices electronically to a bank or credit union (as defined in subsection 123(1) of the ETA), if the bank or credit union has provided written consent to receive those notices electronically.

    Clause 66

    Unnamed persons

    Section 102.1 of the ETA provides a procedure for requesting information or documents that relate to an unnamed person or persons.

    Consequential on the addition of new subsection 99(1.1) (see commentary on that subsection), section 102.1 is amended to replace the references to a notice of a requirement for information being "served" by references to "served or sent".

    Clause 67

    Proof of electronic delivery

    Section 105 of the ETA provides a number of evidentiary and procedural rules dealing with the administration and enforcement of Parts I to VIII of the ETA.

    To accommodate the introduction of electronic delivery of notices under subsection 99(1) of the ETA, new subsection 105(2.1) provides that a sworn affidavit of an officer of the Canada Revenue Agency is evidence of a notice and of that notice having been sent electronically to a person if the affidavit sets out three elements. The first element is that the officer has knowledge of the facts in the particular case. The second element is that the notice was sent electronically to the person on a named day. The third element is that the officer identifies as exhibits annexed to the affidavit a copy of an electronic message confirming that the notice has been sent to the person and a copy of the notice.

    Clause 68

    Requirement to provide documents or information

    Subsection 289(1) of the ETA provides that, despite any other provision of Part IX of the ETA, the Minister of National Revenue may, by a notice served personally or by registered or certified mail, require that any person provide any information or document for any purpose relating to the administration or enforcement of a listed international agreement (as defined in subsection 123(1) of the ETA) or relating to the administration or enforcement of Part IX. An exception is made where the information or document relates to an unnamed person or persons, in which case the procedure set out in subsections 289(2) and (3) of the ETA must be followed.

    Subsection 289(1) is amended so that a notice under that subsection is to be served or sent in accordance with new subsection 289(1.1). In addition to the existing methods of service, subsection 289(1.1) allows the Minister to send such notices electronically to a bank or credit union, if the bank or credit union has provided written consent to receive those notices electronically.

    Clause 69

    Time period not to count

    Section 289.2 of the ETA extends the reassessment period when a person makes an application for judicial review of a requirement for information (other than a requirement for foreign-based information or document under section 292 of the ETA) or when a person files a notice of appearance or otherwise challenges a compliance order.

    Consequential on the addition of new subsection 289(1.1) (see commentary on that subsection), paragraph 289.2(a) is amended to replace the reference to a notice of a requirement for information being "served" by a reference to "served or sent".

    Clause 70

    Requirement to provide foreign-based information

    292(2), (3.1), (4), (6) and (8)

    Subsection 292(2) of the ETA provides that the Minister of National Revenue may, by a notice served personally or by registered or certified mail and subject to judicial review, require any person resident in Canada or a non-resident person that carries on business in Canada to provide any "foreign-based information or document", as defined in subsection 292(1), relevant to the administration or enforcement of Part IX of the ETA.

    Subsection 292(2) is amended so that a notice under that subsection is to be served or sent in accordance with new subsection 292(3.1). In addition to the existing methods of service, subsection 292(3.1) allows the Minister to send such notices electronically to a bank or credit union, if the bank or credit union has provided written consent to receive those notices electronically. Subsection 292(2) is also amended to generally update the wording in accordance with current legislative drafting standards.

    Consequential on the addition of new subsection 292(3.1), the English versions of subsections 292(4), (6) and (8) are amended to replace references to a notice being "served" by references to "served or sent". Subsections 292(4) and (6) are also amended to generally update the wording in accordance with current legislative drafting standards.

    Clause 71

    Proof of electronic delivery

    Section 335 of the ETA provides a number of evidentiary and procedural rules dealing with the administration and enforcement of Part IX of the ETA.

    To accommodate the introduction of electronic delivery of notices under subsections 289(1) and 292(2) of the ETA (see commentary for those subsections), new subsection 335(2.1) provides that a sworn affidavit of an officer of the Canada Revenue Agency is evidence of a notice and of that notice having been sent electronically to a person if the affidavit sets out three elements. The first element is that the officer has knowledge of the facts in the particular case. The second element is that the notice was sent electronically to the person on a named day. The third element is that the officer identifies as exhibits attached to the affidavit a copy of an electronic message confirming that the notice has been sent to the person and a copy of the notice.

    Amendments to the Air Travellers Security Charge Act (ATSCA)

    Clause 72

    Requirement to provide information

    38(1), (2.1), (3), (5) and (7)

    Subsection 38(1) of the ATSCA provides that, despite any other provision of the ATSCA, the Minister of National Revenue may, by a notice served personally or by registered or certified mail, require a person that is resident in Canada or a person that is not resident in Canada but that carries on business in Canada to provide any information or record.

    Subsection 38(1) is amended so that a notice under that subsection is to be served or sent in accordance with new subsection 38(2.1). In addition to the existing methods of service, subsection 38(2.1) allows the Minister to send such notices electronically to a bank or credit union (as defined in subsection 123(1) of the Excise Tax Act), if the bank or credit union has provided written consent to receive those notices electronically. Subsection 38(1) is also amended to generally update the wording in accordance with current legislative drafting standards.

    Consequential on the addition of new subsection 38(2.1), subsection 38(5) and the English versions of subsections 38(3) and (7) are amended to replace references to a notice being "served" by references to "served or sent". Subsections 38(3) and (5) are also amended to generally update the wording in accordance with current legislative drafting standards.

    Clause 73

    Proof of electronic delivery

    Section 83 of the ATSCA provides a number of evidentiary and procedural rules dealing with the administration and enforcement of the ATSCA.

    To accommodate the introduction of electronic delivery of notices under subsections 38(1) of the ATSCA, new subsection 83(2.1) provides that a sworn affidavit of an officer of the Canada Revenue Agency is evidence of a notice and of that notice having been sent electronically to a person if the affidavit sets out three elements. The first element is that the officer has knowledge of the facts in the particular case. The second element is that the notice was sent electronically to the person on a named day. The third element is that the officer identifies as exhibits attached to the affidavit a copy of an electronic message confirming that the notice has been sent to the person and a copy of the notice.

    Amendments to the Excise Act, 2001 (EA, 2001)

    Clause 74

    Requirement to provide records or information

    Subsection 208(1) of the EA, 2001 provides that, despite any other provision of the EA, 2001, the Minister of National Revenue may, by a notice served personally or by registered or certified mail, require that any person provide information or any record for any purpose relating to the administration or enforcement of a listed international agreement (as defined in section 2 of the EA, 2001) or relating to the administration or enforcement of the EA, 2001. An exception is made where the information or document relates to an unnamed person or persons, in which case the procedure set out in subsections 208(2) and (3) must be followed.

    Subsection 208(1) is amended so that a notice under that subsection is to be served or sent in accordance with new subsection 208(1.1). In addition to the existing methods of service, subsection 208(1.1) allows the Minister to send such notices electronically to a bank or credit union (as those terms are defined in subsection 123(1) of the Excise Tax Act), if the bank or credit union has provided written consent to receive those notices electronically.

    Clause 75

    Time period not to count

    Section 209.1 of the EA, 2001 extends the reassessment period when a person makes an application for judicial review of a requirement for information (other than a requirement for foreign-based information or record under section 210 of the EA, 2001) or when a person files a notice of appearance or otherwise challenges a compliance order.

    Consequential on the addition of new subsection 208(1.1) (see commentary on that subsection), paragraph 209.1(a) is amended to replace the reference to a notice of a requirement for information being "served" by a reference to "served or sent".

    Clause 76

    Requirement to provide foreign-based information

    210(2), (3.1), (4), (6) and (8)

    Subsection 210(2) of the EA, 2001provides that the Minister of National Revenue may, by a notice served personally or by registered or certified mail and subject to judicial review, require any person resident in Canada or a non-resident person that carries on business in Canada to provide any "foreign-based information or record", as defined in subsection 210(1), relevant to the administration or enforcement of the EA, 2001.

    Subsection 210(2) is amended so that a notice under that subsection is to be served or sent in accordance with new subsection 210(3.1). In addition to the existing methods of service, subsection 210(3.1) allows the Minister to send such notices electronically to a bank or credit union (as those terms are defined in subsection 123(1) of the Excise Tax Act), if the bank or credit union has provided written consent to receive those notices electronically. Subsection 210(2) is also amended to generally update the wording in accordance with current legislative drafting standards.

    Consequential on the addition of new subsection 210(3.1), the English versions of subsections 210(4), (6) and (8) are amended to replace references to a notice of a requirement for information being "served" by references to "served or sent". Subsections 210(4) and (6) are also amended to generally update the wording in accordance with current legislative drafting standards.

    Clause 77

    Proof of electronic delivery

    Section 301 of the EA, 2001provides a number of evidentiary and procedural rules dealing with the administration and enforcement of the EA, 2001.

    To accommodate the introduction of electronic delivery of notices under subsections 208(1) and 210(2) of the EA, 2001 (see commentary for those subsections), new subsection 301(2.1) provides that a sworn affidavit of an officer of the Canada Revenue Agency is evidence of a notice and of that notice having been sent electronically to a person if the affidavit sets out three elements. The first element is that the officer has knowledge of the facts in the particular case. The second element is that the notice was sent electronically to the person on a named day. The third element is that the officer identifies as exhibits attached to the affidavit a copy of an electronic message confirming that the notice has been sent to the person and a copy of the notice.

    Amendments to the Greenhouse Gas Pollution Pricing Act (GGPPA)

    Clause 78

    Requirement to provide information or record

    Subsection 106(1) of the GGPPAprovides that, despite any other provision of Part 1 of the GGPPA, the Minister of National Revenue may, by a notice served personally or by registered or certified mail, require that any person provide information or any record for any purpose relating to the administration or enforcement of Part 1. An exception is made where the information or document relates to an unnamed person or persons, in which case the procedure set out in subsections 106(2) and (3) must be followed.

    Subsection 106(1) is amended so that a notice under that subsection is to be served or sent in accordance with new subsection 106(1.1). In addition to the existing methods of service, subsection 106(1.1) allows the Minister to send such notices electronically to a bank or credit union (as defined in subsection 123(1) of the Excise Tax Act), if the bank or credit union has provided written consent to receive those notices electronically.

    Clause 79

    Requirement to provide foreign-based information

    144(2), (3.1), (4), (6) and (8)

    Subsection 144(2) of the GGPPA provides that the Minister of National Revenue may, by a notice served personally or by confirmed delivery service and subject to judicial review, require any person resident in Canada or a non-resident person that carries on business in Canada to provide any "foreign-based information or record", as defined in subsection 144(1), relevant to the administration or enforcement of Part 1 of the GGPPA.

    Subsection 144(2) is amended so that a notice under that subsection is to be served or sent in accordance with new subsection 144(3.1). In addition to the existing methods of service, subsection 144(3.1) allows the Minister to send such notices electronically to a bank or credit union (as defined in subsection 123(1) of the Excise Tax Act), if the bank or credit union has provided written consent to receive those notices electronically.

    Consequential on the addition of new subsection 144(3.1), the English versions of subsections 144(4), (6) and (8) are amended to replace the references to a notice of a requirement for information being "served" by references to "served or sent". Subsections 144(4) and (6) are also amended to generally update the wording in accordance with current legislative drafting standards.

    Clause 80

    Proof of electronic delivery

    Section 164 of the GGPPA provides a number of evidentiary and procedural rules dealing with the administration and enforcement of Part 1 of the GGPPA.

    To accommodate the introduction of electronic delivery of notices under subsections 106(1) and 144(2) of the GGPPA (see commentary for those subsections), new subsection 164(2.1) provides that a sworn affidavit of an officer of the Canada Revenue Agency is evidence of a notice and of that notice having been sent electronically to a person if the affidavit sets out three elements. The first element is that the officer has knowledge of the facts in the particular case. The second element is that the notice was sent electronically to the person on a named day. The third element is that the officer identifies as exhibits attached to the affidavit a copy of an electronic message confirming that the notice has been sent to the person and a copy of the notice.

    Amendments to the Income Tax Regulations (the "Regulations" or "ITR")

    Clause 81

    Definitions

    Part I of the Regulations provides rules for deductions at source that must be withheld on specified amounts of "remuneration".

    The definition "remuneration" is amended by adding paragraph (p) to include an amount that is required by new paragraph 56(1)(z.5) of the Act to be included in computing the income of a taxpayer.

    This amendment is consequential on the introduction of advanced life deferred annuities under new section 146.5 of the Act.

    Clause 82

    RDSP disability assistance payment – withholding amount

    The Act requires that tax be withheld from certain payments, such as remuneration. The person making such payments is required to remit the amount withheld to the Receiver General of Canada on behalf of the payee. The withholding on account of income tax from the taxable portions of those payments is to be done in accordance with prescribed rules.

    Part I of the Regulations provides the rules concerning the amounts to be withheld on account of tax by a person paying remuneration. The Regulations set out what amounts are to be included in remuneration, what proportion of such remuneration is subject to withholding and the percentage that must be withheld from such remuneration on account of tax. The Regulations also impose reporting requirements on the person making the payments.

    A Registered Disability Savings Plans (RDSP) is a trust arrangement between a holder and an issuer (a corporation offering the public its services as a trustee). The purpose of such a plan is to provide for the long-term financial security of a beneficiary who has a prolonged and severe physical or mental impairment.

    Payments to RDSP beneficiaries are known as disability assistance payments. Lifetime disability assistance payments are disability assistance payments that, once started, are payable at least annually until the plan is terminated or the beneficiary has died. Both types of payments may be comprised of a portion that is taxable in the hands of an RDSP beneficiary (grants, bonds and investment earnings) and a portion that is not (contributions).

    The formula in subsection 103.1(2) of the Regulations provides a withholding exemption for an amount equal to the sum of the beneficiary's basic personal amount and the disability tax credit for the year from any payments made before withholding begins.

    Consequential on the introduction of the new basic personal amount calculation in new subsection 118(1.1), subparagraph (b)(i) of the description of B in the formula is amended to refer to the unreduced maximum amount determinable under subsection 118(1.1) (i.e., the amount determined for F in that subsection).

    For more information on the computation of the new basic personal amount, see the commentary on new subsection 118(1.1) of the Act.

    This amendment applies to the 2020 and subsequent taxation years.

    Clause 83

    Information return – advanced life deferred annuity

    New section 216 of the Regulations requires the filing of certain information returns in respect of advanced life deferred annuities.

    Subsection 216(1) defines a "designated entity" to be an administrator, issuer, carrier or trustee, as the case may be, of a registered pension plan, pooled registered pension plan, registered retirement savings plan, registered retirement income fund or deferred profit sharing plan.

    Subsection 216(2) applies to a designated entity that transfers an amount to a licensed annuities provider (as defined in subsection 248(1) of the Act) to acquire an advanced life deferred annuity. It requires that the designated entity make an information return in prescribed form in respect of the year in which the transfer was made.

    Subsection 216(3) requires a licensed annuities provider to make an information return in prescribed form in respect of a taxation year in which a payment is made that:

    • is required by section 146.5 of the Act to be included in a taxpayer's income; or
    • is a refund to an annuitant or to a registered plan (as described in paragraph (g) of the definition "advanced life deferred annuity" in subsection 146.5(1) of the Act).

    The prescribed information returns must be filed with the Canada Revenue Agency no later than the end of February following the year of the transfer or the payment, as required by section 205 of the Regulations.

    For more information on advanced life deferred annuities, see the commentary on new section 146.5 of the Act. Also see the commentary on amendments made to subsections 146(16) and 146.3(14.1) and paragraphs 147(19)(d), 147.3(1)(c) and 147.5(21)(c) of the Act, each of which permits a tax-deferred transfer of funds to a licensed annuities provider to acquire an advanced life deferred annuity.

    This amendment comes into force on January 1, 2020.

    Clause 84

    Capital cost allowance

    Part XI of the Regulations provides rules that allow for deductions of capital cost allowance (CCA) in respect of depreciable capital property.

    Various provisions of Part XI are being amended. Many of these amendments are in respect of the addition of new Class 56. The primary effect of the Class 56 amendments is to provide for a temporary first-year enhanced CCA deduction for zero-emission automotive equipment acquired after March 1, 2020 and before 2028.

    Rates

    Paragraph 1100(1)(a) of the Regulations provides various declining-balance CCA rates applicable to certain classes of depreciable property. It is amended by adding new subparagraph 1100(1)(a)(xlii), which sets the general CCA rate for Class 56 at 30%.

    Property acquired in the year

    Subsection 1100(2) provides rules for computing the CCA deduction in respect of a property for the year in which the property first becomes available for use. Subsection 1100(2) has two main parts. The first part, as expressed by elements A and B, relates to the enhanced first-year CCA in respect of "accelerated investment incentive property" of a taxpayer, as defined in subsection 1104(4) of the Regulations, and property included in Classes 54 and 55, relating to "zero-emission vehicles", as defined in subsection 248(1) of the Act. The second part, as expressed by element C, is the so-called "half-year rule", which applies to any other depreciable property and limits a taxpayer's CCA claim to one-half of the otherwise applicable amount, for the year in which the property first becomes available for use.

    Subsection 1100(2) is amended in a number of places in order to add references to new Class 56. The intended effect of these amendments is to provide a CCA deduction of 100% for Class 56 property that becomes available for use after March 1, 2020 and before 2024, a 75% CCA deduction for Class 56 property that becomes available for use in 2024 or 2025 and a 55% CCA deduction for Class 56 property that becomes available for use in 2026 or 2027.

    These amendments come into force on March 2, 2020.

    Paragraphs (c) and (d) of the description of A in subsection 1100(2) are also amended to ensure that appropriate factors apply in respect of certain Class 43, 43.2 and 53 properties. In particular, those paragraphs are amended to take into account the fact that the classification of property into those classes depends, in part, on the time they are acquired whereas the factors set out in element A are based on when the property becomes available for use.

    For example, the amendments to paragraph (c) are intended to provide appropriate results for property that is acquired in 2024 that is included in Class 43.2 but that becomes available for use in 2025. Similarly, the amendments to paragraph (d) are intended to provide appropriate results for property that is acquired in 2025 that is included in Class 53 but that becomes available for use in 2026.

    These amendments apply in respect of property acquired after November 20, 2018.

    Expenditures excluded from element D

    Subsection 1100(2.02) reclassifies expenditures incurred before November 21, 2018 that would otherwise be treated as being in respect of accelerated investment incentive property solely as a result of the application of subparagraph 1104(4)(b)(i). In general terms, that subparagraph allows certain property acquired from a non-arm's length person to qualify as accelerated investment incentive property.

    Subsection 1100(2.02) ensures that any such transfers cannot give rise to an inappropriate amount of enhanced CCA deductions by removing expenditures incurred before November 21, 2018 (the day of the announcement of the "accelerated investment incentive") from element D of subsection 1100(2) and by generally adding them to element F. However, there is an exception for certain inventory purchases.

    Paragraph 1100(2.02)(a) is amended in two ways. First, its scope is broadened so that it now also applies to certain expenditures incurred after November 20, 2018 to which new paragraph 1104(4.1)(b) applies. This new rule is included in subparagraph (ii) (the existing rule is now contained in subparagraph (i)) and is consequential on the addition of new subsection 1104(4.1). For more information, see the commentary on subsection 1104(4.1). Second, the existing exception for certain inventory purchases is broadened to accommodate additional situations.

    These amendments apply in respect of property acquired after November 20, 2018.

    Clause 85

    Property rules

    Section 1102 of the Regulations provides a number of special rules for the purposes of the CCA rules in Part XI.

    Rule for subsection 1102(14) – classes 54 to 56

    Subsection 1102(14.13) excludes from the application of subsection 1102(14) property that is a "zero-emission vehicle", as defined in subsection 248(1) of the Act, that is included in Class 54 or 55. Subsection 1102(14) might otherwise provide that such property, if acquired by a taxpayer from a non-arm's length party, or in the course of a certain type of reorganization, remains property of the same class as that of the vendor.

    Subsection 1102(14.13) is amended to also exclude from the application of subsection 1102(14) property in new Class 56. As such, subsection 1102(14.13) will now ensure that eligibility for Class 54, 55 or 56 treatment in the context of certain non-arm's length or reorganization-related acquisitions will be determined solely based on whether the property, as acquired by the purchaser, meets the relevant criteria for that class as set out in Schedule II to the Regulations.

    This amendment comes into force on March 2, 2020.

    Anti-avoidance

    Subsection 1102(20.1) deems a taxpayer not to be dealing at arm's length with another person or partnership in certain circumstances and is intended to prevent taxpayers from contriving arm's length relationships in order to obtain the more favourable treatment that is available because of subsection 1104(4) in respect of arm's length transfers.

    Subsection 1102(20.1) is amended to broaden its scope, primarily so that it can also apply to counter artificial arrangements entered into with a view to satisfying the arm's length condition in the newly expanded "inventory" exclusion in subparagraph 1100(2.02)(a)(i).

    This amendment applies in respect of property acquired after July 30, 2019.

    Clause 86

    Opting out of class 54 to 56 treatment

    Subsection 1103(2j) of the Regulations provides taxpayers the ability to opt-out of Class 54 or 55 treatment and instead include the relevant property in its otherwise applicable CCA class, such as Class 10, 10.1 or 16.

    Subsection 1103(2j) is amended in order to provide a similar option for property that is eligible for inclusion in new Class 56.

    This amendment comes into force on March 2, 2020.

    Clause 87

    Interpretation

    Section 1104 of the Regulations provides a number of interpretation rules for the CCA regime.

    Accelerated investment incentive property

    Subsection 1104(4) defines accelerated investment incentive (AII) property for the purposes of Part XI and Schedules II to VI of the Regulations. This definition is one of the main provisions that implements the enhanced CCA rules that were first announced in November 2018.

    Subsection 1104(4) currently contains exclusions for Class 54 and Class 55 property. The rules relating to these classes provide an independent means of granting enhanced CCA deductions.

    Consequential on the introduction of new Class 56, which is also subject to an independent enhanced CCA regime, subsection 1104(4) is amended to exclude property that is included in that class.

    This amendment comes into force on March 2, 2020.

    In general terms, subparagraph 1104(4)(b)(i) provides the conditions for property to qualify as AII property where it is acquired from a non-arm's length party. It currently specifies two conditions. First, the property must not have been used for any purpose before its acquisition. Second, no other person or partnership can have claimed capital cost allowance (or a terminal loss) in respect of the property.

    Subparagraph 1104(4)(b)(i) is amended to remove the first condition and to clarify that no person or partnership, including the taxpayer, can have claimed CCA in a taxation year ending prior to the acquisition in order to satisfy the requirements of the subparagraph.

    This amendment applies in respect of property acquired after November 20, 2018.

    Deemed separate properties

    New subsection 1104(4.1) is added for the purposes of the AII property definition in subsection 1104(4) in order to ensure appropriate results in the event that certain property constructed over multiple taxation years is transferred between non-arm's length parties before it is put in use. As such, it is only relevant for property that does not qualify as AII property under subparagraph 1104(4)(b)(ii).

    Subparagraph 1104(4)(b)(i) allows property of a taxpayer that is acquired from a non-arm's length party to qualify as AII property where no prior CCA claims have been made in respect of the property. The capital cost of a single property can include several expenditures incurred over multiple taxation years. Under special rules in subsections 13(27) and (29) of the Act, some of these expenditures can be eligible for CCA claims before the property is completed and ready to be used. Where a taxpayer avails itself of these claims, whether in respect of expenditures incurred before November 21, 2018 or after November 20, 2018, this could preclude any expenditures in respect of the property from qualifying as AII property in the event of a subsequent transfer of the property to a non-arm's length person.

    New subsection 1104(4.1) is introduced in order to ensure that any portions of a single property for which CCA claims are made do not taint any expenditures for which CCA claims are not made. This rule deems any such portions of the single property to be separate properties so that the "other" expenditures can satisfy the condition in subparagraph 1104(4)(b)(i) and be eligible for the enhanced CCA available for AII property. However, in order to preclude two or more taxpayers in a non-arm's length group from benefitting from the AII incentive more than once in respect of the same expenditures, subsection 1100(2.02), as amended, ensures that any amounts deemed to be separate properties under subsection 1104(4.1) are not eligible to be included in determining the enhanced CCA under variable D of the formula in subsection 1100(2).

    This amendment applies in respect of property acquired after November 20, 2018.

    Clause 88

    Payment of pension

    Paragraph 8502(e) of the Regulations generally requires that retirement benefits from a registered pension plan begin to be paid to each member no later than the end of the year in which the member turns 71 years of age, or in the case of variable benefits provided under paragraph 8506(1)(e.1), no later than the end of the year in which the member turns 72 years of age.

    Subparagraph 8502(e)(i) is amended by adding new clause (C), consequential on the introduction of variable payment life annuities (VPLAs) described in new paragraph 8506(1)(e.2). Subclause (C)(I) requires that VPLA benefits commence to be paid to the member by the end of the year in which the member turns 71 years of age (if the VPLA was acquired before that time). If the transfer to acquire a VPLA is made after the year in which the member turns 71 years of age, subclause (C)(II) requires that VPLA benefits commence to be paid to the member by the end of the year of the transfer. The latter deadline recognizes that a member who is receiving variable benefits from their account in years after age 71 may choose to transfer all or a portion of the account to the VPLA fund to acquire a VPLA.

    For more information on VPLAs, see the commentary on new paragraph 8506(1)(e.2) and new subsection 8506(13).

    This amendment comes into force on January 1, 2020.

    Clause 89

    Eligible service

    Paragraph 8503(3)(a) of the Regulations restricts the lifetime retirement benefits provided to a member under a defined benefit provision of a registered pension plan (RPP) to benefits that are provided in respect of certain periods of eligible service.

    Each of subparagraphs 8503(3)(a)(v), (v.1) and (vi) is amended to prohibit an individual pension plan (IPP) from providing retirement benefits in respect of past years of service under a defined benefit RPP of an employer other than the IPP's participating employer (or its predecessor employer). This means that an individual cannot transfer to an IPP their pensionable service or eligible service from a defined benefit RPP of a former employer (other than a predecessor employer). This is the case even if the relevant pensionable service was credited under the other RPP prior to March 19, 2019.

    These amendments apply in respect of pensionable service that is credited to a member under an individual pension plan on or after March 19, 2019.

    Clause 90

    Money purchase provisions

    Section 8506 of the Regulations sets out the benefits that may be provided under a money purchase provision of a pension plan and the conditions applicable to them.

    Variable benefits

    Paragraph 8506(1)(e.1) permits a registered pension plan to provide retirement benefits (referred to as "variable benefits") to a member under a money purchase provision, and to beneficiaries of the member after the member's death, by means of payments from the member's account. It generally permits money purchase benefits to be provided in the same manner as is permitted under a registered retirement income fund. The opening words of paragraph 8506(1)(e.1) distinguish variable benefits from other retirement benefits "permissible under any of paragraphs (a) to (e)".

    Consequential on the introduction of variable payment life annuities (VPLAs) under new paragraph 8506(1)(e.2), paragraph (e.1) is amended to add a reference to paragraph (e.2). The "variable benefits" option for money purchase provisions of pension plans is not replaced or affected by the new VPLA option.

    Variable payment life annuity

    New paragraph 8506(1)(e.2) sets out the conditions under which a money purchase provision of a pension plan may provide benefits from a VPLA ("VPLA benefits").

    The VPLA benefits may be paid only from a VPLA fund (as described in new subsection 8506(13)). A member may acquire a right to VPLA benefits by transferring one or more amounts from the member's account to the VPLA fund. Note that a corresponding amendment to paragraph 8506(2)(g) exempts VPLA benefits from the retirement benefits that otherwise must be provided by means of annuities purchased from an insurance company.

    The VPLA benefits are limited to retirement benefits described in paragraphs 8506(1)(a) to (e), (g) and (i), except that indexing of benefits is limited to increases in the Consumer Price Index or increases not exceeding 2 per cent per annum. For example, a plan member could choose a joint-lives (member and spouse) annuity payable directly from the VPLA fund, with a guarantee of five years of payments. Those retirement benefits are described in paragraphs 8506(1)(a), (c) and (d) and qualify as VPLA benefits. Prior to the death of a VPLA annuitant, a commuted value payment (as described in paragraph 8506(1)(h)) is permitted only in the case that a VPLA fund is terminated.

    The amount of VPLA benefits payable to each member or beneficiary must be adjusted if the VPLA fund rate of return or the rate of mortality of members and beneficiaries differs materially from the actuarial assumptions used to determine the VPLA benefits.

    Retirement benefits

    Paragraph 8506(2)(g) generally requires that retirement benefits payable under a money purchase provision of a registered pension plan be provided by means of annuities purchased from a licensed issuer of annuities. An exception is provided for variable benefits (described in paragraph 8506(1)(e.1)) that are paid to a member directly from the member's account.

    Consequential on the introduction of variable payment life annuities under new paragraph 8506(1)(e.2), paragraph 8506(2)(g) is amended to add a reference to paragraph 8506(1)(e.2), thereby excluding VPLAs from the retirement benefits that must be provided by means of annuities purchased from an insurance company.

    VPLA fund

    New subsection 8506(13) sets out three conditions that must be satisfied for an arrangement to qualify as a "VPLA fund" under a money purchase provision of a pension plan for the purposes of new paragraph 8506(1)(e.2) and new clause 8502(e)(i)(C).

    Paragraph 8506(13)(a) prohibits contributions to the fund other than amounts transferred from accounts of members of the plan. Note from subparagraph (ii) of new paragraph 8506(1)(e.2) that variable payment life annuity entitlements may be acquired only by means of transfers from member accounts.

    Paragraph 8506(13)(b) requires that the arrangement be established with at least 10 members and that it is reasonable to expect that the arrangement will have at least 10 members on an ongoing basis.

    Paragraph 8506(13)(c) provides that no benefit may be paid from the fund other than the VPLA benefits described in subparagraph 8506(1)(e.2)(iii).

    The amendments to section 8506 come into force on January 1, 2020.

    Clause 91

    Additional prescribed conditions

    Subsection 8510(7) of the Regulations imposes additional prescribed conditions for the registration of a registered pension plan that is a specified multi-employer plan (SMEP) as defined in subsection 8510(2).

    Subsection 8510(7) is amended to add new paragraph (c), which prohibits contributions to

    • a SMEP in respect of a member after the calendar year in which the member turns 71 years of age; and
    • a defined benefit provision of a SMEP during a period (other than a phased retirement period) for which retirement benefits are being paid to the member.

    Paragraph 8510(7)(c) is intended to ensure that no contributions will be made to a SMEP in respect of an employee who works for a participating employer during a period for which the employee is prohibited by paragraphs 8502(e) and 8503(3)(b) from accruing further benefit entitlements.

    This amendment applies in respect of contributions made pursuant to a collective bargaining agreement entered into after 2019, except that it does not apply in respect of contributions made on or before the date the agreement is entered into.

    Clause 92

    Employees on leave with pay

    Section 8901.2 of the Regulations prescribes the weekly wage subsidy amounts for eligible employees who are on leave with pay during the week.

    Consequential on amendments to the definition "qualifying period" in subsection 125.7(1) of the Act that provide chronologically defined names for each of the qualifying periods for the subsidies in that section, this regulation is amended to update references to various qualifying periods. It is also amended to provide parameters for up to the nineteenth qualifying period and to provide that the prescribed amount is nil for the twentieth and subsequent qualifying periods.

    Clause 93

    Capital cost allowance – prescribed classes

    Schedule II to the Regulations lists the properties that can be included in each CCA class. A portion of the capital cost of depreciable property is deductible as CCA each year. CCA rates for each type of property, identified by their CCA classes, are set out in section 1100 of the Regulations.

    Class 56 (30% CCA rate)

    New Class 56 is introduced to provide a temporary first-year enhanced CCA deduction for certain property that is acquired, and becomes available for use, by the taxpayer after March 1, 2020 and before 2028. While generally subject to a 30% CCA rate, Class 56 property is eligible for a first-year accelerated CCA rate as a result of amended subsection 1100(2). For more information, see the commentary on subsection 1100(2) of the Regulations.

    To be eligible for inclusion in Class 56, property must meet the conditions in paragraphs (a) and (b).

    Paragraph (a) generally provides that the property must be automotive equipment, other than a motor vehicle (as defined in subsection 248(1) of the Act),and must be fully electric, fully powered by hydrogen or fully powered by a combination of electricity and hydrogen. The exclusion of motor vehicles is generally intended to result in Class 56 capturing all such automotive equipment that is not designed for use on highways or streets. Those that are designed for use on highways or streets should generally be eligible for inclusion in Class 54 or 55.

    Class 56 is intended to include any type of zero-emission automotive (i.e., self-propelled) equipment that is not a motor vehicle. Notable examples would be zero-emission aircraft, watercraft, trolley buses and railway locomotives.

    Paragraph (a) also provides, under subparagraph (a)(ii), that the costs of certain additions or alterations may qualify for Class 56 treatment. Additions or alterations will so qualify if they convert automotive equipment (other than a motor vehicle) into zero-emission property. Thus, for example, the costs of converting a gas-powered watercraft into a fully electric watercraft could be eligible for Class 56 treatment. The intention is that such costs would generally be considered to be available for use once the entire equipment can be used in a manner that produces no emissions.

    Paragraph (b) contains a restriction in that property can qualify for Class 56 treatment only if such property would otherwise be considered "accelerated investment incentive property" under subsection 1104(4). Essentially, this condition is meant to exclude from Class 56 property in respect of which CCA has previously been claimed by another person or partnership where the equipment was acquired by the taxpayer on a tax-deferred "rollover" basis or it was previously owned or acquired by the taxpayer or a non-arm's length person or partnership. In this regard, all rules relating to the "accelerated investment incentive property" definition must be taken into account, such as the anti-avoidance rule in subsection 1102(20.1).

    Amendments to the Canada Disability Savings Regulations (CDSR)

    Interpretation

    Clause 94

    Paragraph (b) of the French language version of the definition "montant de retenue" (assistance holdback amount) in section 1 of the CDSR is amended to better align the wording of the French and English versions.

    This amendment comes into force on January 1, 2021.

    Repayments

    Clause 95

    The portion of subsection 5(1) of the CDSR that is before paragraph (a) is amended by removing the reference to section 5.2.

    Subsection 5(1) is also amended by adding the word "or" at the end of paragraph (b) and repealing paragraph (c) to provide that Canada Disability Savings grants (grants) and bonds (bonds) paid into a Registered Disability Savings Plan (RDSP) will no longer need to be repaid if a beneficiary loses their Disability Tax Credit (DTC) eligibility.

    Subsection 5(3) is amended by removing the phrase "or ceases to be a DTC-eligible individual". If a beneficiary of a Specified Disability Savings Plan (SDSP) loses DTC eligibility, the issuer of the plan will not be required to repay to the Minister any grants and bonds because they lost their DTC eligibility.

    Section 5 is also amended by adding subsection 5(4) to provide that when a beneficiary of an RDSP or SDSP loses DTC eligibility, no grants or bonds are repayable to the Minister of Employment and Social Development (ESD) after the end of the calendar year in which the beneficiary attains the age of 59, regardless of death or the other circumstances listed in subsection 5(1) or 5(3).

    The amendments to section 5 come into force on January 1, 2021.

    Clause 96

    The portion of section 5.1 of the CDSR that is before paragraph (a) is amended by removing the reference to "subsection 146.4(4.1) of the Income Tax Act" and by adding the phrase "while the beneficiary of an RDSP is no longer a DTC-eligible individual". These amendments provide that if the beneficiary of a plan has lost DTC eligibility, an issuer will only have to repay grants and bonds to the Minister of ESD if one of the three remaining "trigger events" listed in paragraph 5(1)(a), (b) or (d) occurs. The "trigger events" are:

    • the plan is closed;
    • the plan ceases to be an RDSP as the result of the application of paragraph 146.4(1)(a) of the Income Tax Act;or
    • the beneficiary dies.

    The amount to be repaid, if any, is the lesser of:

    • the fair market value of the property in the plan immediately before one of the three "trigger events" occurred, and
    • the amount determined by the formula A+B-C in paragraph 5.1(b). See below for the new definition of element A. (The definitions of elements B and C are in paragraph 5.1(b)).

    Paragraph 5.1(b) is also amended by replacing the description of element A to provide that the amount of any grant and bond repayments after an RDSP beneficiary has lost DTC eligibility and one of the three "trigger events" in paragraph 5(1)(a), (b) or (d) occurs, is calculated as follows:

    • If the trigger event occurs prior to the calendar year in which the beneficiary attains age 51, element A is the total amount of bonds and grants paid into the RDSP during the 10-year period before the day the beneficiary lost DTC eligibility.
    • If the trigger event occurs after the calendar year in which the beneficiary attains age 50 and before the calendar year the beneficiary attains age 60, and the beneficiary ceased to be DTC-eligible before the calendar year in which they attained age 50, element A is initially the total amount of grants and bonds paid into the RDSP in the 10 years before loss of DTC eligibility. This is "the reference period". This period of years, and the corresponding amount of grants and bonds, is then reduced by one year as each calendar year passes. A formula is provided for calculating this number of years.
    • Same factual situation as described in (ii) above except that the beneficiary ceases to be DTC-eligible after the calendar year in which they attain 49 years of age. In this case, element A is the total amount of grants and bonds paid into the RDSP in the 10 years before the trigger event occurs, and ending on the day before the beneficiary ceased to be DTC-eligible. This period of years is the new "reference period". As in (ii) above, that period of years is reduced by one year as each year passes.
    • If the trigger event occurs after the calendar year in which the beneficiary attains 59 years of age, the amount to be repaid becomes nil.

    The amendments to section 5.1 come into force on January 1, 2021.

    Clause 97

    Section 5.2 of the CDSR is repealed. The loss of DTC eligibility will no longer trigger the closure of an RDSP.

    This amendment comes into force on January 1, 2021.

    Clause 98

    Section 5.3 of the CDSR is amended by adding subsection 5.3(3) to provide that no grants and bonds are repayable if the disability assistance payment is made after the end of the calendar year in which the beneficiary has attained age 59.

    This amendment comes into force on January 1, 2021.

    Clause 99

    The portion of subsection 5.4(1) of the CDSR before paragraph (a) is replaced to provide that if a disability assistance payment is made to an RDSP beneficiary who is no longer DTC-eligible, the amount of the repayment will be the lesser of:

    • $3 of grants and bonds for every $1 withdrawn from the RDSP (the proportional repayment rule);
    • the fair market value of the property in the RDSP immediately before the disability assistance payment is made; and
    • the amount determined by the formula A+B-C in paragraph 5.1(c).

    Paragraph 5.4(1)(c) is also amended by replacing the description of element A to provide that after the calendar year in which a beneficiary attains age 50, the amount of grants and bonds that an issuer (as defined under 146.4(1) of the Income Tax Act) may be obliged to repay to the Minister of ESD is progressively decreased as the beneficiary becomes older, so that when an RDSP beneficiary has lost DTC eligibility:

    • If a disability assistance payment is made before the calendar year in which the beneficiary attains age 51, element A is the total amount of bonds and grants paid into the RDSP within the 10-year period before the day the beneficiary ceased to be DTC-eligible.
    • If a disability assistance payment is made between the calendar year when the beneficiary attains age 51 and before the calendar year in which the beneficiary attains age 60, and in addition, if the beneficiary ceased to be DTC-eligible before the calendar year in which they attained age 50, element A is initially the total amount of grants and bonds paid into the RDSP in the ten years before the beneficiary ceased to be DTC-eligible. That period of years, and thus the total amount, is then reduced as each calendar year passes. A formula is provided for calculating the number of years.
    • Same factual situation as described in (ii) above except that the beneficiary ceases to be DTC-eligible after the calendar year in which they attain age 49. Element A is the total amount of grants and bonds paid into the RDSP in the 10 years before the disability assistance payment is made, and ending on the day before the beneficiary ceased to be DTC-eligible. This period of years is the new reference period. As in (ii) above, that period of years is reduced by one year as each year passes.
    • If a disability assistance payment is made after the calendar year in which the beneficiary attains age 59, the amount to be repaid is nil.

    Subsection 5.4(2) is replaced to set out the order in which the repayment of grants and bonds occurs, based on the principle of first in, first out. When a disability assistance payment is made from the RDSP of a person who is no longer DTC-eligible and the proportional repayment rule applies ($3 of grant and bond for every $1 of disability assistance payment made), the issuer must first repay the oldest grants and bonds that were paid into the plan within the relevant period.

    The amendments to section 5.4 come into force on January 1, 2021.