Canada: CB Budget Watch Commentary

The Honourable Bill Morneau, Minister of Finance, today tabled his third budget – “Equality + Growth: A Strong Middle Class” – which supports the Government’s people centered approach. 

The highly anticipated budget released draft legislation related to passive income – the topic that has been on the minds of business owners, investors, and advisors since the July 18, 2017 Finance release which first introduced the subject.  The budget does not propose changes to tax rates at the business or personal level. The budget focused on five key spending areas – growth, progress, reconciliation, advancement and equality.  

The following is a brief overview of the key tax measures.

Business Income Tax Measures

Corporate Tax Rates

Budget 2018 does not propose any changes to business income tax rates.

Passive Investment Income

Budget 2018 proposes two measures, applicable to taxation years that begin after 2018, to limit tax deferral advantages on passive investment income earned inside private corporations.

Business Limit

Business Limit - Reduction

Budget 2018 proposes to reduce the business limit for Canadian Controlled Private Corporations (CCPCs) (and their associated corporations) that have significant income from passive investments.

Under this measure, the business limit will be reduced on a straight-line basis for CCPCs having between $50,000 and $150,000 in investment income. In other words, for every $1 of investment income in excess of $50,000, the small business reduction will be reduced by $5.

Active business income qualifying for the small business tax rate under new business limit ($)

CCPCs with business income above the reduced business limit will be taxed on income above the business limit at the general corporate tax rate.

The business limit reduction under this measure will operate alongside the business limit reduction that applies in respect of taxable capital in excess of $10 million. The reduction in a corporation’s business limit will be the greater of the reduction under this measure and the existing reduction based on taxable capital.

The reduction of the business limit for any particular corporation under this measure will be based on the investment income of the corporation and, consistent with the reduction in the business limit based on taxable capital, any other associated corporations with which it is required to share the business limit for a taxation year.

Business Limit – Adjusted Aggregate Investment Income

For the purpose of determining the reduction of the business limit of a CCPC, investment income will be measured by a new concept of “adjusted aggregate investment income” which will be based on “aggregate investment income” (a concept that is currently used in computing the amount of refundable taxes in respect of a CCPC’s investment income) with certain adjustments. The adjustments will include the following:

• taxable capital gains (and losses) will be excluded to the extent they arise from the disposition of
  
  
  • a property that is used principally in an active business carried on primarily in Canada by the CCPC or by a related CCPC; or
  • a share of another CCPC that is connected with the CCPC, where, in general terms, all or substantially all of the fair market value of the assets of the other CCPC is attributable directly or indirectly to assets that are used principally in an active business carried on primarily in Canada, and certain other conditions are met;
• net capital losses carried over from other taxation years will be excluded;
• dividends from non-connected corporations will be added; and
• income from savings in a life insurance policy that is not an exempt policy will be added, to the extent it is not otherwise included in aggregate investment income.

Application

This measure will apply to taxation years that begin after 2018.

Rules will apply to prevent transactions designed to avoid the measure, such as the creation of a short taxation year in order to defer its application and the transfer of assets by a corporation to a related corporation that is not associated with it.

Refundability of Taxes on Investment Income

Budget 2018 proposes that a refund of Refundable Dividend Tax on Hand (RDTOH) be available only in cases where a private corporation pays non-eligible dividends. An exception will be provided in respect of RDTOH that arises from eligible portfolio dividends received by a corporation, in which case the corporation will still be able to obtain a refund of that RDTOH upon the payment of eligible dividends.

The different treatment proposed regarding the refund of taxes imposed on eligible portfolio dividend income will necessitate the addition of a new RDTOH account.

• This new account (eligible RDTOH) will track refundable taxes paid under Part IV of the Income Tax Act (ITA) on eligible portfolio dividends. Any taxable dividend (i.e., eligible or non-eligible) will entitle the corporation to a refund from its eligible RDTOH account (subject to the ordering rule described below).
• The current RDTOH account (which will now be referred to as non-eligible RDTOH) will track refundable taxes paid under Part I of the ITA on investment income as well as under Part IV on non-eligible portfolio dividends (i.e., dividends that are paid by non-connected corporations as non-eligible dividends). Refunds from this account will be obtained only upon the payment of non-eligible dividends.

RDTOH Recapture – Connected Corporations

If a corporation obtains a refund of RDTOH upon the payment of a dividend to a connected corporation, the corporation receiving such a dividend will continue to pay an amount of Part IV tax equal to the refund obtained by the payor corporation. This amount, however, will be added to the RDTOH account of the recipient corporation that matches the RDTOH account from which the payor corporation obtained its refund.

RDTOH Refunds – Ordering Rule

Upon the payment of a non-eligible dividend, a private corporation will be required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.

Application

This measure will apply to taxation years that begin after 2018.

An anti-avoidance rule will apply to prevent the deferral of the application of this measure through the creation of a short taxation year.

A corporation’s existing RDTOH balance will be allocated as follows:

• For a CCPC, the lesser of its existing RDTOH balance and an amount equal to 38⅓ per cent of the balance of its general rate income pool, if any, will be allocated to its eligible RDTOH account. Any remaining balance will be allocated to its non-eligible RDTOH account.
• For any other corporation, all of the corporation’s existing RDTOH balance will be allocated to its eligible RDTOH account.

Tax Support for Clean Energy

Budget 2018 proposes to extend eligibility for Class 43.2 (which provides accelerated capital cost allowance rates of 50 per cent, on a declining balance basis, for investments in specified clean energy generation and conservation equipment) by five years, so that it is available in respect of property acquired before 2025.

Artificial Losses Using Equity-Based Financial Arrangements

The Government is concerned that certain taxpayers are still engaging in abusive arrangements that are intended to circumvent the dividend arrangement rules.  Accordingly, the government is introducing specific legislation to clarify certain aspects of the synthetic equity arrangement rules and the securities lending arrangement rules to prevent taxpayers from realizing artificial tax losses through the use of equity based financial arrangements to circumvent these rules.

Synthetic Equity Arrangements

Budget 2018 proposes an amendment to the no tax-indifferent investor exception to the synthetic equity arrangement rules that will clarify that the exception cannot be met when a tax-indifferent investor obtains all or substantially all of the risk of loss and opportunity for gain or profit in respect of the Canadian share, in any way, including where the tax-indifferent investor has not entered into a synthetic equity arrangement or a specified synthetic equity arrangement in respect of the share.

The proposed amendments will apply to dividends that are paid, or become payable, on or after Budget Day.

Securities Lending Arrangement

Budget 2018 proposes an amendment to broaden the “securities lending arrangement” definition in the ITA to ensure that taxpayers that enter into arrangements that are substantially similar to those that fall within that definition are subject to several provisions normally applicable to “securities lending arrangements”. As a result of this amendment, when a taxpayer receives dividends on a Canadian share acquired under such a substantially similar arrangement, the dividend rental arrangement rules will generally apply. Therefore, the inter-corporate dividend deduction will be denied, resulting in a dividend income inclusion that will appropriately offset the available deduction for the amount of the corresponding dividend compensation payments made to the counterparty under the arrangement.

Budget 2018 also proposes an amendment to clarify the interaction of two rules governing the deductibility of dividend compensation payments made by a taxpayer under a securities lending arrangement. Under the first rule, a taxpayer that is a registered securities dealer is permitted to deduct up to two-thirds of a dividend compensation payment to a counterparty. The second rule applies when a securities lending arrangement is a dividend rental arrangement. In these circumstances, the second rule generally permits the taxpayer, whether or not it is a registered securities dealer, to fully deduct any dividend compensation payment made to the counterparty. The proposed amendment will clarify that this first rule does not apply when the second rule applies.

The proposed amendments to the securities lending arrangement rules will apply to dividend compensation payments that are made on or after Budget Day unless the securities lending or repurchase arrangement was in place before Budget Day, in which case the amendments will apply to dividend compensation payments that are made after September 2018.

Stop-Loss Rules on Share Repurchase Transactions

Budget 2018 proposes to amend the provisions of the ITA pertaining to shares held as mark-to-market property so that the tax loss otherwise realized on a share repurchase is generally decreased by the dividend deemed to be received on that repurchase when that dividend is eligible for the inter-corporate dividend deduction.

This measure will apply in respect of share repurchases that occur on or after Budget Day.

At-Risk Rules for Tiered Partnerships

A recent Federal Court of Appeal decision has constrained the application for the at-risk rules in the context of tiered partnership structures. 

Budget 2018 proposes to clarify that the at-risk rules apply to a partnership that is itself a limited partner of another partnership. This measure, along with a number of consequential changes, will ensure that the at-risk rules apply appropriately at each level of a tiered partnership structure. In particular, for a partnership that is a limited partner of another partnership, the losses from the other partnership that can be allocated to the partnership’s members will be restricted by that partnership’s at-risk amount in respect of the other partnership.

In addition, consistent with the long-standing understanding of the at-risk rules, limited partnership losses of a limited partner that is itself a partnership will not be eligible for an indefinite carry-forward. Such losses will be reflected in the adjusted cost base of the partnership’s interest in the limited partnership.

This measure will apply in respect of taxation years that end on or after Budget Day, including in respect of losses incurred in taxation years that end prior to Budget Day. In particular, losses from a partnership incurred in a taxation year that ended prior to Budget Day will not be available to be carried forward to a taxation year that ends on or after Budget Day if the losses were allocated – for the year in which the losses were incurred – to a limited partner that is another partnership.

Trust Tax Measures

Reporting Requirements

Budget 2017 announced the Government’s intention to examine ways to enhance the tax reporting requirements for trusts in order to improve the collection of beneficial ownership information.

Budget 2018 proposes to require that certain trusts provide additional information on an annual basis. The new reporting requirements will impose an obligation on certain trusts to file a T3 return where one does not currently exist. The new reporting requirements will apply to express trusts that are resident in Canada and to non-resident trusts that are currently required to file a T3 return.

Exceptions to the additional reporting requirements are proposed for the following types of trusts:

• mutual fund trusts, segregated funds and master trusts;
• trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts);
• lawyers’ general trust accounts;
• graduated rate estates and qualified disability trusts;
• trusts that qualify as non-profit organizations or registered charities; and
• trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the taxation year (provided, in the latter case, that their holdings are confined to deposits, government debt obligations and listed securities).

Where the new reporting requirements apply to a trust, the trust will be required to report the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability (through the trust terms or a related agreement) to exert control over trustee decisions regarding the appointment of income or capital of the trust (e.g. a protector).

The proposed new reporting requirements will apply to returns required to be filed for the 2021 and subsequent taxation years. 

Budget 2018 proposes to introduce new penalties for a failure to file a T3 return, including a required beneficial ownership schedule, in circumstances where the schedule is required.  The penalty will be equal to $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500.  If a failure to file the return was made knowingly, or due to gross negligence, an additional penalty will apply.  The additional penalty will be equal to five per cent of the maximum fair market value of property held during the relevant year by the trust, with a minimum penalty of $2,500.  As well, existing penalties will continue to apply.  

The new penalties will apply in respect of returns required to be filed for the 2021 and subsequent taxation years.

Health and Welfare Trusts

Budget 2018 proposes that only one set of rules apply to trusts established by an employer for the purposes of providing health and welfare benefits to its employees. As such, the Canada Revenue Agency (CRA) will no longer apply their administrative positions with respect to Health and Welfare Trusts after the end of 2020. To facilitate the conversion of existing Health and Welfare Trusts to Employee Life and Health Trusts, transitional rules will be added to the ITA. Trusts that do not convert (or wind up) to an Employee Life and Health Trust will be subject to the normal income tax rules for trusts. In addition, the CRA will not apply its administrative positions with respect to Health and Welfare Trusts to trusts established after Budget Day and will announce transitional administrative guidance relating to winding up existing Health and Welfare Trusts.  Stakeholders are invited to submit comments on transitional issues.

Personal Tax Measures

Budget 2018 does not propose any changes to personal tax rates, and does not propose changes to the capital gains inclusion rate.

Canada Worker’s Benefit

Budget 2018 proposes to rename the current Working Income Tax Benefit to the Canada Workers Benefit (CWB).  Further, it proposes that, for 2019, the amount of the benefit be equal to 26 per cent of each dollar of earned income in excess of $3,000 to a maximum benefit of $1,355 for single individuals without dependants and $2,335 for families.  The benefit will be reduced by 12 per cent of adjusted net income in excess of $12,820 for single individuals without dependants and $17,025 for families.

Individuals who are eligible for the Disability Tax Credit may also receive a CWB disability supplement.  Budget 2018 also proposes that the maximum amount of the CWB disability supplement be increased to $700 in 2019, and the phase-out threshold of the supplement be increased to $24,111 for single individuals without dependants and to $36,483 for families.  The reduction rate of the supplement will be decreased to 12 per cent to match the proposed rate for the basic benefit and to 6 per cent where both partners in a family are eligible for the supplement.

These measures will apply to the 2019 and subsequent taxation years, and the government will allow for province or territory specific changes to the design of the benefits.

If an individual does not claim the benefit, they currently cannot obtain the benefit even if they would otherwise qualify.  Budget 2018 proposes to allow the CRA to determine if the individual is eligible to receive the benefit and assess the return as if the benefit had been claimed.

Medical Expense Tax Credit (METC) – Eligible Expenditures

Budget 2018 proposes to expand the METC to recognize expenses where they are incurred in respect of an animal specially trained to perform tasks for a patient with a severe mental impairment in order to assist them in coping with their impairment (e.g., a psychiatric service dog trained to assist with post-traumatic stress disorder).  Eligible expenses are: the cost of such an animal, cost for its care and maintenance, including food and veterinary care; reasonable travel expenses incurred for a patient to attend a facility that trains patients in the handling of such animals; and reasonable board and lodging expenses for a patient’s full time attendance at such a facility. 

This measure will apply in respect of eligible expenses incurred after 2017.

Registered Disability Savings Plan (RDSP) – Qualifying Plan Holders

Where the capacity of an adult individual to enter into a contract is in doubt, the ITA requires that the plan holder of the individual’s RDSP be the individual’s legal representative.  Where the adult individual does not have a legal representative in place, a temporary federal measure exists to allow a qualifying family member (i.e. a parent, spouse or common law partner) to be the plan holder of the individual’s RDSP.  This measure is legislated to expire at the end of 2018.  Budget 2018 proposes to extend the temporary measure by five years, to the end of 2023. 

Deductibility of Employee Contributions to the Enhanced Portion of the Quebec Pension Plan

On November 2, 2017, the Government of Quebec announced that the Quebec Pension Plan (QPP) would be enhanced in a manner similar to the enhancement of the Canada Pension Plan (CPP) that was announced in 2016.

To provide consistent income tax treatment of the CPP and QPP contributions, Budget 2018 proposes to amend the ITA to provide a deduction for employee contributions (as well as the “employee” share of contributions made by self-employed persons) to the enhanced portion of the QPP. 

Since contributions to the enhanced portion of the QPP will begin to be phased in starting in 2019, this measure will apply to the 2019 and subsequent taxation years.

Child Benefits – Retroactive Eligibility of Foreign-Born Status Indians

Under the Canada Child Benefit, as announced in Budget 2016, foreign-born status Indians residing legally in Canada who are neither Canadian citizens nor permanent residents are eligible for the benefit, where all other eligibility requirements are met. However, these individuals were not eligible under the previous system of child benefits.

Budget 2018 proposes that such individuals be made retroactively eligible for the Canada Child Tax Benefit, the National Child Benefit supplement and the Universal Child Care Benefit, where all other eligibility requirements are met.  This amendment applies from the 2005 taxation year to June 30, 2016.

Child Benefits - Provincial / Territorial Access to Taxpayer Information

Budget 2018 proposes to amend the ITA to provide legislative authority for the government to share with the provinces and territories taxpayer information related to the Canada Child Benefit, as of July 1, 2018, solely for the purpose of administering their social assistance payment regimes.

Mineral Exploration Tax Credit for Flow-Through Share Investors

The Government proposes to extend the eligibility of the mineral exploration tax credit for an additional year to flow through share agreements entered into on or before March 31, 2018.  Under the existing “look back” rule, funds raised in one calendar year with the benefit of the credit can be spent on eligible exploration up to the end of the following calendar year. 

Canada’s New Parental Sharing Benefit

Budget 2018 proposes a new five-week Employment Insurance (EI) Parental Sharing Benefit that will be available as a “use it or lose it” benefit top-up when both parents agree to share parental leave.  The new benefit will be available to eligible two-parent families, including adoptive and same-sex couples.

The benefit will increase the duration of EI parental leave by up to five weeks in cases where the second parent agrees to take a minimum of five weeks using the standard parental option of 55 per cent of earnings for 12 months.  Alternatively, where families have opted for extended parental leave at 33 per cent of earnings for 18 months, the second parent would be able to take up to eight weeks of additional parental leave.

Other Tax Measures - Charities

Municipalities as Eligible Donees

Budget 2018 proposes to amend the ITA to allow transfers of property to municipalities to be considered qualifying expenditures for the purposes of the revocation tax, subject to the approval of the Minister of National Revenue on a case-by-case basis.  In situations where a suitable recipient cannot be found to keep a property in the charitable sector, this change will allow the property to be transferred to a municipality for the benefit of the community. 

This measure will apply to transfers made on or after Budget Day.

Universities outside Canada

To streamline the registration process for universities outside Canada as qualified donees, Budget 2018 proposes to remove the requirement that universities outside Canada be prescribed in the Income Tax Regulations. 

This measure will apply as of Budget Day.

International Tax Measures

Cross-Border Surplus Stripping Using Partnerships and Trusts

Budget 2018 proposes to amend the cross-border anti-surplus stripping rules to add comprehensive “look-through” rules for transactions involving partnerships or trusts. These rules will allocate the assets, liabilities and transactions of a partnership or trust to its members or beneficiaries, as the case may be, based on the relative fair market value of their interests.

This measure will apply to transactions that occur on or after Budget Day.

Transactions that occur before Budget Day may be challenged using the general anti-avoidance rule.

Foreign Affiliates

Investment Businesses

Budget 2018 proposes to introduce a rule for the purposes of the investment business definition so that, where income attributable to specific activities carried out by a foreign affiliate accrues to the benefit of a specific taxpayer under a tracking arrangement, those activities carried out to earn such income will be deemed to be a separate business carried on by the affiliate. Each separate business of the affiliate will therefore need to satisfy each relevant condition in the investment business definition, including the six employees’ test, in order for the affiliate’s income from that business to be excluded from Foreign Accrual Property Income (FAPI).

The introduction of this deeming rule for the purposes of the investment business definition ensures that a foreign affiliate will be treated as having separate businesses where a tracking arrangement exists. Some tracking arrangements may give rise to separate businesses irrespective of whether this new rule applies. The CRA may challenge such arrangements (and other planning with similar effect) on this basis and may also seek to apply existing anti-avoidance rules where appropriate.

This measure will apply to taxation years of a taxpayer’s foreign affiliate that begin on or after Budget Day.

Controlled Foreign Affiliate Status

Budget 2018 proposes to deem a foreign affiliate of a taxpayer to be a controlled foreign affiliate of the taxpayer if FAPI attributable to activities of the foreign affiliate accrues to the benefit of the taxpayer under a tracking arrangement. This measure is intended to ensure that each taxpayer involved in such a tracking arrangement – no matter how large the group – is subject to accrual taxation in respect of FAPI attributable to that taxpayer.

This measure will apply to taxation years of a taxpayer’s foreign affiliate that begin on or after Budget Day.

Trading or Dealing in Indebtedness

A condition under the investment business rules requires a taxpayer to satisfy certain minimum capital requirements in order to qualify for the regulated foreign financial institutions exception.

Budget 2018 proposes to add a similar minimum capital requirement to the trading or dealing in indebtedness rules.

This measure will apply to taxation years of a taxpayer’s foreign affiliate that begin on or after Budget Day.

Reassessments

Budget 2018 proposes to extend the reassessment period for a taxpayer by three years in respect of income arising in connection with a foreign affiliate of the taxpayer.

This measure will apply to taxation years of a taxpayer that begin on or after Budget Day.

Reporting Requirements

Budget 2018 proposes to bring the information return (i.e. T1134) deadline in respect of a taxpayer’s foreign affiliates in line with the taxpayer’s income tax return deadline by requiring the information returns to be filed within six months after the end of the taxpayer’s taxation year.

In order to give taxpayers time to adjust to this change, this measure will apply to taxation years of a taxpayer that begin after 2019.

Reassessment Period – Requirements for Information and Compliance Orders

Budget 2018 proposes to amend the ITA to introduce a “stop-the-clock” rule for requirements for information and for compliance orders. This rule will extend the reassessment period of a taxpayer by the period of time during which the requirement or compliance order is contested. The period will generally start, in the case of a requirement for information, at the time the taxpayer makes an application for judicial review of the requirement or, in the case of a compliance order, at the time the taxpayer opposes, generally by way of notice of appearance, the CRA’s application for a compliance order. The period will end upon the final disposition of the application (including any appeals). Related amendments will also be made to conform the rules with respect to requirements for foreign-based information. This measure will apply in respect of challenges instituted after Royal Assent to the enacting legislation.

Reassessment Period – Non-Resident Non-Arm’s Length Persons

Budget 2018 proposes to amend the ITA to provide the CRA with an additional three years to reassess a prior taxation year of a taxpayer, to the extent the reassessment relates to the adjustment of the loss carryback, where: a reassessment of a taxation year is made as a consequence of a transaction involving a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length; the reassessment reduces the taxpayer’s loss for the taxation year that is available for carryback; and all or any portion of that loss had in fact been carried back to the prior taxation year.

This measure will apply in respect of taxation years in which a carried back loss is claimed, where that loss is carried back from a taxation year that ends on or after Budget Day.

Sharing Information for Criminal Matters

Budget 2018 proposes to allow the legal tools available under the Mutual Legal Assistance in Criminal Matters Act (MLACMA) to be used with respect to the sharing of criminal tax information under Canada’s tax treaties and Tax Information Exchange Agreements (TIEAs), and the Convention. These tools include the ability for the Attorney General to obtain court orders to gather and send information. The CRA will continue to be involved in sharing tax information internationally and will work with the Department of Justice, which administers the MLACMA.

Budget 2018 also proposes to enable the sharing of tax information with Canada’s mutual legal assistance partners in respect of acts that, if committed in Canada, would constitute terrorism, organized crime, money laundering, criminal proceeds or designated substance offences (i.e., offences listed in section 462.48 of the Criminal Code).

Budget 2018 also proposes to enable confidential information under Part IX of the Excise Tax Act (ETA) and the Excise Act, 2001 to be disclosed to Canadian police officers in respect of those offences where such disclosure is currently permitted in respect of taxpayer information under the ITA.

To give effect to these measures, legislative amendments may be proposed to the MLACMA, the Criminal Code, the ITA, Part IX of the ETA and the Excise Act, 2001. The Government intends to propose that any such amendments come into force upon Royal Assent to the enacting legislation.

Sales and Excise Tax Measures

GST/HST and Investment Limited Partnerships

On September 8, 2017, the Government released draft legislative and regulatory proposals relating to the application of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) to investment limited partnerships. These proposals would clarify that GST/HST is payable on the fair market value of management and administrative services provided to an investment limited partnership by the general partner of the investment limited partnership where consideration becomes due or is paid on or after September 8, 2017.  The proposals would also make investment limited partnerships “investment plans” under the GST/HST and extend the special HST rules currently applicable to investment plans to investment limited partnerships effective January 1, 2019. In addition, the proposals would provide GST/HST relief to investment limited partnerships with non-resident investors where certain conditions are met.

Budget 2018 confirms the Government’s intention to proceed with these proposals with the following changes:

First, Budget 2018 proposes to modify the September 8, 2017 proposal so that the GST/HST applies to management and administrative services rendered by the general partner on or after September 8, 2017, and not to management and administrative services rendered by the general partner before September 8, 2017 unless the general partner charged GST/HST in respect of such services before that date. Budget 2018 also proposes that the GST/HST be generally payable on the fair market value of management and administrative services in the period in which these services are rendered.

Second, Budget 2018 proposes to allow an investment limited partnership to make an election to advance the application of the special HST rules as of January 1, 2018.

Tobacco Taxation

Budget 2018 proposes to advance the existing inflationary adjustments for tobacco excise duty rates to occur on an annual basis rather than every five years.  To ensure consistency in the excise framework, inflationary adjustments will take effect on April 1 of every year, starting in 2019.  Effective the day after Budget Day, tobacco excise duty rates will be adjusted to account for inflation since the last inflationary adjustment in 2014.

Budget 2018 also proposes to increase the excise duty rates by an additional $1 per carton of 200 cigarettes, along with corresponding increases to the excise duty rates on other tobacco products. 

Inventories of cigarettes held by manufacturers, importers, wholesalers and retailers at the end of Budget Day will be subject to an inventory tax of $0.011468 per cigarette.  Taxpayers will have until April 30, 2018 to file returns and pay the cigarette inventory tax.

Proposed tobacco excise duty rates effective after Budget Day:

Cannabis Taxation

Budget 2018 proposes a new federal excise duty framework for cannabis products to be introduced as part of the Excise Act, 2001.  Significant details were provided within the budget.

Consultations on the GST/HST Holding Corporation Rules

A GST/HST rule, commonly referred to as the “holding corporation rule”, which generally allows a parent corporation to claim input tax credits to recover GST/HST paid in respect of expenses that relate to another corporation.  The Government intends to consult on certain aspects of the holding corporation rule, particularly with respect to the limitation of the rule to corporations and the required degree of relationship between the parent corporation and the commercial operating corporation.

Status of Outstanding Tax Measures

Budget 2018 confirms the Government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:

• Measures confirmed in Budget 2016 relating to the Goods and Services Tax/Harmonized Sales Tax joint venture election;
• Income tax measures announced in Budget 2016 expanding tax support for electrical vehicle charging stations and electrical energy storage equipment;
• The income tax measure announced in Budget 2016 on information reporting requirements for certain dispositions of an interest in a life insurance policy;
• Technical income tax legislative amendments released on September 16, 2016, relating to a division of a corporation under foreign laws, and to the requirements to qualify as a prescribed share;
• The income tax measure announced in Budget 2017 to support the establishment of a tax-exempt Memorial Grant for First Responders (the Community Heroes benefit);
• The income tax measure announced on May 18, 2017 for additional tax relief for Canadian armed forces personnel and police officers;
• Remaining legislative and regulatory proposals released on September 8, 2017 relating to the Goods and Services Tax/Harmonized Sales Tax;
• The income tax measure announced on October 16, 2017 to lower the small business tax rate from 10.5 per cent to 10 per cent, effective January 1, 2018, and to 9 per cent, effective January 1, 2019, which was included in a Notice of Ways and Means Motion tabled on October 24, 2017 along with related amendments to the gross-up amount and dividend tax credit for taxable dividends;
• The income tax measure announced on October 24, 2017 in the Fall Economic Statement to provide for the indexing of the Canada Child Benefit amounts as of July 1, 2018 instead of July 1, 2020; and
• Income tax measures released on December 13, 2017 to address income sprinkling.

Budget 2018 also reaffirms the Government’s commitment to move forward as required with technical amendments to improve the certainty of the tax system.

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