Department of Finance - Explanatory Notes Released

The Department of Finance has released explanatory notes for the Notice of Ways and Means Motion tabled on November 28, 2008. These proposals, a thorough review of the pertinent changes to the 2008 personal tax return, the tax impact of the current financial crisis on households for 2009/2010 and the tax consequences of debt management will be discussed in detail on The Knowledge Bureau Nationwide Update Tour January 9 to 17, 2009 . Spaces are still available for locations in Toronto, Winnipeg, Calgary, Edmonton and Vancouver.

There are a number of tax initiatives contained in the Motion from the 2008 budget as well as tax changes released in July 2008. These initiatives were presented in the July 16^th and July 23^rd Breaking Tax and Investment issues. Click here for a link to those archived versions.

The Motion also includes provisions that were proposed in the 2008 Economic and Fiscal Statement issued on November 27, 2008. Other provisions outlined in the Motion are as follows:

Changes for Employees Employee Benefit Plans

Because of changes to the Canada US Income Tax Convention (Fifth Protocol), S. 6(1)(g) is adjusted so that only employee contributions to an employee benefit plan which not deductible are excluded from income when received.

Exchange of Employee Security Options

S. 7(1.4)(b) is amended to ensure that when a SIFT is reorganized into a corporation, any employee securities options in the successor corporation are deemed to be the same as the original options for SIFT units.

Canada Employment Credit

S. 118(10) is amended so that income received under the new Wage Earner Protection Program Act (WEPP) is eligible for the Canada Employment Credit, beginning in 2008.

Changes for Investors TFSA After Death

S. 12(1)(z.5) stipulates that income earned after death and during the first year of the trust created by that death, on capital that was part of a TFSA at the time of death will be included in the income of the recipient if paid out of the trust and otherwise in the income of the trust if not paid out.

Definition of Investment Contract

S. 12(11) is amended to exclude a TFSA from the definition of "Investment Contract" so that TFSA earnings will not be included in income by virtue of S. 12(4).

Capital Gains - Identical Property

S. 40(3.5)b.1) is amended to deem that shares in capital stock in as SIFT wind-up corporation be identical to equity in a SIFT wind-up entity. This change is to ensure that no deemed dispositions occur when a SIFT is converted to a corporation.

Annuities in TFSA

S. 56(1)(d) is amended to ensure that income from an annuity held within a TFSA is not included in income.

TFSA as Collateral for Loans

S. 146.2 is amended to ensure that taxpayers may use their TFSA as collateral for arm's length loans with no income tax consequences.

SIFT Unit for Share Exchange

S. 85.1 is amended to allow for a tax-deferred exchange of SIFT units for shares in the successor corporation so long as the fair market value of the units and exchange shares are the same. Where the FMV of the exchange shares exceeds the FMV of the SIFT units, the taxpayer must include the difference in income as a shareholder benefit. Where the FMV of the exchange shares is less than the FMV of the SIFT units and it is reasonable to regard that excess as a benefit that the taxpayer wanted to be conferred on a non-arm's length person or partnership, the taxpayer must include that excess in income as a shareholder benefit.

Non-Resident Income Earned in Canada

S. 115 is amended to ensure that amount received by a non-resident under the new Wage Earner Protection Program Act (WEPP) are considered to be income earned in Canada for 2008 and subsequent taxation years.

Former Resident ñ Replaced Shares

S. 128.3 is amended to allow for the replacement of SIFT units with shares in a successor corporation to be treated as if they were the same property. This will affect the taxation status of former residents who owned SIFT units when they departed which were subsequently replaced with shares when the SIFT was reorganized.

Other Provisions Income Assistance

S. 56(1)(r) is amended to ensure that assistance received under government assistance programs that are similar to income replacement payments provided under the Employment Insurance Act are to be included in the recipient's income. This will include income received under the new Wage Earner Protection Program Act (WEPP), beginning in 2008.

Moving Expenses

S. 62(1)(c) is amended to include WEPP (Wage Earner Protection Program Act) payments paid with respect to work at a new location to be included in income earned at the new work location for the purposes of limiting moving expenses to income earned at the new work location.

RRIF Minimum Payments and Re-Contributions

S. 60.021 and S. 146.3 are added to implement the proposed changes to RRIFs for 2008 that was announced on November 28. For tax year 2008 only, the minimum withdrawals from RRIFs are reduced to 75% of the minimum withdrawal amount otherwise calculated. Taxpayers who have already withdrawn more than the new minimum may re-contribute any excess to the RRIF and exclude the re-contribution from income. The deadline for recontribution is the later March 29, 2009 and 30 days after the legislation receives Royal Assent.

RPP Variable Benefit Minimum Amount

ITR 8506 are amended for the tax year 2008 only to adjust the minimum amount required to be received as variable benefits under a money-purchase RPP to be consistent with the 25% reduction in the minimum amount for RRIF withdrawals.

Refundable Medical Expense Supplement

S. 122.51 is amended to ensure that income received under the new Wage Earner Protection Program Act (WEPP) is included in "earned income" for the limitation of the Refundable Medical Expense supplement.

Working Income Tax Benefit

S. 127.2 is amended to income received under the new Wage Earner Protection Program Act (WEPP) in the definition of "working income" for the purpose of the Working Income Tax Benefit.

Investment Tax Credit Carryover

S. 127(9.01) is amended to allow unclaimed ITCs to be carried forward for 20 years, beginning with unclaimed amounts from tax year 1998.

Likewise, S. 127(36) is amended to allow for recapture of ITCs claimed back to 1998.

TFSA Abuse Rules

• S. 207 is adjusted to further clarify the circumstances under which the penalty for the extension of an advantage to a non-arm's length person in respect of a TFSA.
• S207.02 is adjusted to clarify that a person's TFSA contribution room is not increased by a distribution that is necessary to remove any excess TFSA amount.
• S. 207.01 is adjusted to remove "exempt contributions" from the definition of excess TFSA amounts. Exempt contributions are amounts rolled over from the TFSA of a deceased taxpayer to the TFSA of a surviving spouse or common-law partner. The rules surrounding "exempt contributions" in S207.01 are modified to require that the transfer be made by the end of the taxation year following the death and extending the deadline for the designation to 30 days after the date that the transfer is actually made.
• S. 207.03 is amended to allow a noon-resident to make qualifying transfers or exempt contributions to their TFSA without attracting a penalty tax.
• S. 207.06 is amended to remove the minister's authority to waive penalty tax on prohibited investment income earned within a TFSA.

Business Numbers

S. 241 is amended to allow sharing of Business Number information with other levels of government

Disclosure of Personal Information

• S. 241 is amended to allow an official to share with a representative of a government entity the business number and the name of the holder of a business number so long as that entity uses the business number as an identifier in connection with a program, activity or service. A "government entity" is defined in S. 241(10) to include federal, provincial, municipal and aboriginal entities, including boards or commissions established by such groups to perform administrative or regulatory functions.
• New S. 241(9.3) allows the minister to make public the business number and name of the holder in connection with a program, activity or service provided or undertaken by the minister.
• New S. 241(9.4) allows a representative of a government agency to make public the information provided to them by the minister under S. 241.

Medical Expenses

ITR 5700 is amended to add the following medical devices, the cost of which is an allowable medical expense, beginning in 2008:

• altered auditory feedback devices for the treatment of a speech disorder;
• electrotherapy devices for the treatment of a medical condition or a severe mobility impairment;
• standing devices for standing therapy in the treatment of a severe mobility impairment; and
• pressure pulse therapy devices for the treatment of a balance disorder.

New ITR 5701 describes the types of substances, the cost of which is an allowable medical expense, for expenses after February 26, 2008. To qualify, the substance must meet the following criteria:

• be manufactured, sold or represented for use in the diagnosis, treatment or prevention of a disease, disorder or abnormal physical state, or its symptoms, or in restoring, correcting or modifying an organic function;
• be prescribed for a patient by a medical practitioner; and
• may, in the jurisdiction in which it is acquired, be lawfully acquired for use by the patient only with the intervention of a medical practitioner.

This change allows medicines that are available without a prescription to be claimed so long as they are made available to the patient by a medical practitioner (such as a pharmacist).

Auto Expenses

ITR 7305.1 is amended to agree with the automobile benefit rates for 2008 that were announced on December 24, 2007.

ITR 7306 is amended to agree with the automobile deduction limits for 2008 that were announced on December 24, 2007.

Pension Credits

ITR 8308 is amended consequential to the changes to the Fifth Protocol so that individuals who accrue benefits under an unregistered foreign pension plan in respect of employment with an employer who is carrying on business in Canada do not accrue RRSP contribution room in respect of that employment.

Corporations Taxable Income Earned in a Province, etc.

Part IV of the ITR provides prescribed rules for the determination of the net income of a corporation earned in the year.

Subsection 400(1) of the Regulations is amended to refer to the definition of taxable income earned in the year in a province in subject 124(4) and clarifies the prescribed rules. The 2009 and subsequent tax years will be impacted by the amendment.

International Banking Centres - New Subsection 400(1.1) provides for amounts related to a corporation's income or loss from its international banking centre business. This will also apply for 2009 and subsequent taxation years.

Permanent Establishment - Subsection 400(2)(e.1) provides that for a corporation that doesn't have a permanent establishment, the jurisdiction of its head office or registered office is deemed to be their permanent establishment.

Foreign Net Insurance Premiums

New subsection 403(4) provides that net premiums for insurance on property located in a country other than Canada will be deemed to be a premium to respect of insurance on property to the corporation's permanent establishment is located.