Explanatory Notes Relating to the Income Tax Act, Excise Tax Act, Excise Act and Related Legislation

310 Pages·2017·1.62 MB·English

Explanatory Notes Relating to the Income Tax Act,

Excise Tax Act, Excise Act and Related Legislation

Published by
The Honourable William Francis Morneau, P.C., M.P.
Minister of Finance

October 2017
Preface
These explanatory notes describe proposed amendments to the Income Tax Act¸ Excise Tax Act, Excise Act and
related 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 William Francis Morneau, P.C., M.P.
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.
Table of Contents
Clause in Section
Legislation Amended Topic Page

Part 1 – Amendments to the Income Tax Act and to Related Legislation
Income Tax Act
2 10 Work in progress ............................................................................................ 7
3 10.1 Elective use of the mark-to-market method .................................................... 8
4 12 Bond premiums .............................................................................................. 16
5 18 Work space in home ....................................................................................... 17
6 20 Bond premiums .............................................................................................. 33
7 34 Professional business ...................................................................................... 35
8 37 Scientific research and experimental development ......................................... 35
9 39 Business investment loss ................................................................................ 37
10 40 Principal residence – reduction of gain ........................................................... 39
11 43 Ecological gifts ............................................................................................... 42
12 53 Partnership stop-loss rules .............................................................................. 43
13 54 Definitions ...................................................................................................... 44
14 56 Pooled registered pension plans ...................................................................... 46
15 56.4 Restrictive covenants ...................................................................................... 46
16 60.03 Eligible pension income ................................................................................. 48
17 62 Eligible moving expenses (students) .............................................................. 48
18 63 Income exceeding income of supporting person ............................................. 49
19 66 Resource related expenses .............................................................................. 49
20 66.1 Canadian exploration expenses ....................................................................... 50
21 75 Trust attribution .............................................................................................. 51
22 80.03 Definitions ...................................................................................................... 51
23 85 Eligible derivatives ......................................................................................... 52
24 87 Mark-to-market election for derivatives ......................................................... 53
25 88 Parked debt. .................................................................................................... 56
26 89 Capital dividend account ................................................................................ 57
27 90 Upstream loan continuity – reorganizations ................................................. 58
28 91 Amounts to be included in respect of share of foreign affiliate ...................... 64
29 94 Non-resident trusts .......................................................................................... 77
30 95 Foreign affiliate definitions ............................................................................ 77
31 96 Agreement or election of partnership members .............................................. 82
32 97 Rules if election by partners ........................................................................... 82
33 98 Depreciable property — leasehold interests and options ................................ 82
34 100 Transfer of an interest in partnership to tax exempt ....................................... 83
35 104 Deemed disposition by trust ........................................................................... 83
36 107 Distributions from a trust ................................................................................ 84
37 108 Definitions ...................................................................................................... 84
38 110 Employee options ........................................................................................... 86
39 110.1 Ecological gifts ............................................................................................... 88
40 111 Definitions ...................................................................................................... 89
41 112 Interest in a partnership – cost reduction ........................................................ 90
42 118 Pension credit ................................................................................................. 91
43 118.1 Definitions - “total ecological gifts” ............................................................... 91
44 118.2 Medical expense credit ................................................................................... 92
45 118.6 Students eligible for the disability tax credit .................................................. 94
46 122 Tax payable by trust ....................................................................................... 95
Clause in Section
Legislation Amended Topic Page

47 122.51 Refundable medical expense supplement ....................................................... 95
48 125 Specified cooperative income ......................................................................... 96
49 126 Dispositions ignored ....................................................................................... 97
50 127 Definitions ...................................................................................................... 98
51 129 Dividends paid to bankrupt controlling corporation ....................................... 98
52 132.2 Definitions re qualifying exchange of mutual funds ....................................... 99
53 138 Income — designated foreign insurance business .......................................... 103
54 138.1 Rules relating to segregated funds .................................................................. 109
55 138.2 Segregated funds – merger rules ..................................................................... 110
56 146 Definition of “retirement savings plan” .......................................................... 113
57 146.1 Registered Education Savings Plan ................................................................ 114
58 146.4 Registered Disability Savings Plan ................................................................. 118
59 147.3 Excess transfers to SPP and PRPP .................................................................. 122
60 147.5 Joint and several liability in respect of amounts received from a PRPP ......... 122
61 148 Life insurance policies .................................................................................... 123
62 152 Assessment and reassessment ......................................................................... 126
63 181.1 Where tax not payable .................................................................................... 128
64 186.1 Exempt corporations ....................................................................................... 128
65 204.2 Undeducted RRSP premiums ......................................................................... 128
66 Part XI Taxes in respect of registered disability savings plans ................................... 129
67 Part XI.01 Taxes in respect of registered plans ................................................................ 129
68 207.01 Taxes in respect of registered plans ................................................................ 129
69 207.04 Both prohibited and non-qualified investment ................................................ 134
70 207.05 Amount of tax payable ................................................................................... 135
71 207.07 Multiple holders or subscribers....................................................................... 136
72 207.1 Tax payable by trust under RESP ................................................................... 136
73 207.31 Tax payable by recipient of an ecological gift ................................................ 137
74 212 Non-resident withholding tax – Pension benefits ........................................... 137
75 212.3 Foreign affiliate dumping – conditions for application ................................... 138
76 220 Designations and allocations .......................................................................... 139
77 248 Definitions ...................................................................................................... 139
78 249.1 When subsection (9) ceases to apply .............................................................. 140
79 256 Factual control - interpretation ....................................................................... 141
80 259 Definitions ...................................................................................................... 143
81 261 Definitions ...................................................................................................... 143
Economic Action Plan 2013 Act,
No. 2
82 60 AMT & Limited Partnership Losses ............................................................... 144
Income Tax Regulations
83 221 Qualified investment....................................................................................... 145
84 222 RDSP or RESP information return ................................................................. 145
85 306 Exempt policies .............................................................................................. 145
86 404 Banks allocation ............................................................................................. 148
87 404.1 Federal credit union allocation ....................................................................... 149
88 412 Divided businesses ......................................................................................... 149
89 600 Late elections ................................................................................................. 150
90 806, 806.1 International organizations and agencies ........................................................ 150
91 1104 Capital cost allowance – interpretation ........................................................... 151
92 1219 Canadian renewable and conservation expense .............................................. 152
Clause in Section
Legislation Amended Topic Page

93 1401 Policy reserves ............................................................................................... 154
94 3500 Donations........................................................................................................ 154
95 4900 Qualified investment....................................................................................... 155
96 5600 Prescribed distributions .................................................................................. 157
97 5907 Exception - hybrid entities .............................................................................. 158
98 6204 Prescribed shares ............................................................................................ 159
99 6503 Prescribed provisions - pensions..................................................................... 160
100 7300 Saskatchewan Loan Forgiveness Program ..................................................... 160
101 8302 Optional forms ............................................................................................... 161
102 8503 Eligible service ............................................................................................... 161
103 8517 Optional forms ............................................................................................... 162
104 Schedule II Class 43.1 ...................................................................................................... 162
Regulations Amending the
Income Tax Regulations
(Omnibus, No. 3)
105 29 Repeal of Part LIV .......................................................................................... 165

Part 2 – Amendments to the Excise Tax Act (GST/HST Measures)
Excise Tax Act
106 123 Definitions ................................................................................................................1. 66
107 130.1 Arrangements deemed to be trusts ............................................................................1. 69
108 141.01 Apportionment rules .................................................................................................1. 70
109 149 Meaning of “investment plan” ..................................................................................1. 71
110 155 Non-arm’s length supplies ........................................................................................1. 72
111 157 Pension Plans — election for nil consideration ........................................................1. 73
112 167 Effect of election ......................................................................................................1. 79
113 168 Deposits ....................................................................................................................1. 79
114 172.1 Pension Plans............................................................................................................1. 80
115 172.2 Tax deemed paid by designated pension entity ........................................................2. 06
116 178 Restriction on input tax credits .................................................................................2. 11
117 178.3 Adjustments to direct seller’s net tax ........................................................................2. 11
118 178.4 Adjustment to distributor’s net tax ...........................................................................2. 12
119 178.5 Restriction on input tax credits .................................................................................2. 12
120 178.6 Buying group method ...............................................................................................2. 13
121 179 Drop shipments ........................................................................................................2. 14
122 180 Receipt of property from non-resident......................................................................2. 45
123 183 Seizure and repossession .........................................................................................2. 46
124 184 Supply to insurer on settlement of claim ..................................................................2. 46
125 217 Definitions ................................................................................................................2. 47
126 217.1 Imported supplies of financial institutions ................................................................2. 50
127 218.1 Tax in participating province ....................................................................................2. 53
128 220.05 Pension entities .........................................................................................................2. 57
129 220.08 Tax on intangible property and services ...................................................................2. 58
130 225.1 Net tax ......................................................................................................................2. 60
131 225.2 Selected listed financial institutions .........................................................................2. 61
132 232.01 Tax adjustment notes ................................................................................................2. 66
133 232.02 Effect of tax adjustment note ....................................................................................2. 74
134 235 Net tax if passenger vehicle leased ...........................................................................2. 82
135 252.41 Joint and several liability ..........................................................................................2. 83
Clause in Section
Legislation Amended Topic Page
136 252.5 Liability for amount paid or credited ........................................................................2.84
137 254 Joint and several liability ..........................................................................................2.84
138 254.1 Joint and several liability ..........................................................................................2.85
139 259 Application for rebate — subsequent claim period ..................................................2.85
140 261.01 Pension plan rebates .................................................................................................2.88
141 261.31 Joint and several liability ..........................................................................................2.92
142 266 Receivership rules ....................................................................................................2.93
143 267.1 Joint and several liability ..........................................................................................2.93
144 272.1 Joint and several liability ..........................................................................................2.95
145 273.1 Non-arm’s length transactions ..................................................................................2.94
146 289 Judicial authorization ...............................................................................................2.95
147 296 Assessments .............................................................................................................2.95
148 298 Period for assessment ...............................................................................................2.96
149 304 When application to be granted ................................................................................2.96
150 324 Compliance by unincorporated bodies .....................................................................2.97
151 325 Transfer not at arm’s length......................................................................................2.97
152 335 Evidence and procedure ...........................................................................................2.98
153 V/VI/1 Definitions ................................................................................................................2.98
154 V/VI/20 Supply by government, municipality, etc. ................................................................3.00
155 V/VI/24 and Exempt municipal transit services .............................................................................
24.1 301
156 V/VI/26 Labour organizations ................................................................................................3.03
157 VII/3 Tourist literature .......................................................................................................3.03
158 VII/5 and 5.1 Imported goods under a warranty .............................................................................3.04
159 X/I/12 Tourist literature ............................................................................................. 304
160 X/I/14 Goods supplied under warranty and brought into a participating province ..............3.05
161 Various Definition “Agency” .................................................................................................3.05
162 Various Definition “specified Crown agent” .........................................................................3.05
Public Service Body Rebate (GST/HST) Regulations
163 2.1 Definition “specified Crown agent” .........................................................................3.06
Specified Crown Agents (GST/HST) Regulations
164 Various Definition “specified Crown agent” .........................................................................3.06
Part 3 – Amendments to the Excise Act
Excise Act
165 1.2 Non-application – transformation of beer concentrate .............................................3.07
166 4 Definitions ................................................................................................................3.07
167 170 Duties – beer or malt liquor and beer concentrate ....................................................3.08
168 170.1 Exclusion – beer concentrate ....................................................................................3.09
7

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

Clause 2
Work in progress
Income Tax Act (ITA)
10(14)
Section 34 of the Income Tax Act (Act) provides an exception to full accrual accounting in
computing the income of a business that is a professional practice of an accountant, dentist,
lawyer, medical doctor, veterinarian or chiropractor by allowing the income to be determined
without taking into account any work in progress at year end.
Subsection 10(14) of the Act provides, for the purposes of 10(12) and 10(13), that a property
included in the inventory of a business includes professional work in progress that would be
included if paragraph 34(a) (the basic rule described above) did not apply.
Consequential on the repeal of section 34, subsection 10(14) is repealed.
This amendment comes into force on January 1, 2024.

Work in progress – transitional rule
ITA
10(14.1)
Section 34 of the Act provides an exception to full accrual accounting in computing the income
of a business that is a professional practice of an accountant, dentist, lawyer, medical doctor,
veterinarian or chiropractor by allowing the income from that business to be determined without
taking into account any work in progress at year end.
Consequential on the repeal of section 34, new subsection 10(14.1) of the Act provides a five-
year transitional rule for the purpose of valuing work in progress from a business that is a
professional practice of one of the designated professions listed above. Subsection 10(14.1)
provides that for the purposes of computing the income of a taxpayer from a business the cost
and the fair market value of the taxpayer’s work in progress from the business is deemed to be:
 20 per cent of the cost and fair market value of the taxpayer’s work in progress at the end
of the first taxation year that begins after March 21, 2017;
 40 per cent of the cost and fair market value of the taxpayer’s work in progress at the end
of the second taxation year that begins after March 21, 2017;
 60 per cent of the cost and fair market value of the taxpayer’s work in progress at the end
of the third taxation year that begins after March 21, 2017; and
 80 per cent of the cost and fair market value of the taxpayer’s work in progress at the end
of the fourth taxation year that begins after March 21, 2017.
8

For the fifth taxation year that begins after March 21, 2017, the full amount in respect of work in
progress must be included in computing income from a professional business.
This transitional relief is available to a taxpayer who elected to exclude work in progress in
computing income in respect of the last taxation year that begins before March 22, 2017.
New subsection 10(14.1) applies to taxation years ending after March 21, 2017.

Clause 3
Elective use of the mark-to-market method
ITA
10.1
New section 10.1 of the Act sets out rules for the timing of recognition of a taxpayer’s profit or
loss in respect of derivatives held on income account. These rules have two basic components.
The first component of these rules introduces a new elective regime that allows a taxpayer to
mark-to-market its eligible derivatives (as defined in new subsection 10.1(5)) on an annual basis.
 New subsection 10.1(1) describes the process for electing into this mark-to-market
regime.
 New subsection 10.1(2) provides taxpayers with the possibility of revoking an election.
 New subsection 10.1(3) ensures that any re-election into the mark-to-market regime will
apply only on a prospective basis.
 New subsection 10.1(4) directs electing taxpayers to two separate mark-to-market
valuation rules whose respective application depends on whether the taxpayer qualifies as
a financial institution (as defined in subsection 142.2(1)).
 In general terms, new subsection 10.1(5) defines an eligible derivative as any financial
derivative instrument held on income account that has a practically verifiable fair market
value.
 New subsection 10.1(6) provides the mark-to-market valuation rule for eligible
derivatives held by electing taxpayers that are not financial institutions.
 New subsection 10.1(7) defers the recognition of unrealized profits or losses that accrued
on eligible derivatives held by a taxpayer at the beginning of an election year until the
taxation year in which these derivatives are actually disposed of.
 New subsection 10.1(9) contains interpretative rules that apply for the purposes of new
subsections 10.1(4) to (7).
 Consequential amendments to other provisions of the Act are also introduced to protect
the integrity of the elective mark-to-market regime and to ensure that this choice does not
lead to avoidance opportunities. For more information, see the commentary on paragraph
18(14)(c), new subsection 85(1.12), subsection 85(2), new paragraphs 87(2)(e.41) and
(e.42), paragraph 88(1)(e.2), new paragraph 88(1)(j) and subsections 96(3) and 97(2).
9

The second component of these rules, contained in new subsection 10.1(8), imposes the
realization method as the default method of profit computation for any derivative held on income
account (including eligible derivatives) by a taxpayer that is not a financial institution and that
has not elected into the mark-to-market regime.
These amendments apply to taxation years that begin after March 21, 2017.

Mark-to-market election
ITA
10.1(1)
New subsection 10.1(1) of the Act allows a taxpayer to recognize its profit or loss in respect of
its eligible derivatives (as defined in new subsection 10.1(5)) on a mark-to-market basis by
electing to have new subsection 10.1(4) apply to the taxpayer. New subsection 10.1(4) directs
electing taxpayers to two separate mark-to-market valuation rules whose respective application
depends on whether the taxpayer is a financial institution for the purposes of the mark-to-market
property rules in sections 142.2 to 142.6.
An election to have new subsection 10.1(4) apply in a particular taxation year must be filed with
the Minister of National Revenue on or before the taxpayer’s filing due date for that taxation
year. Once made, the election is valid for that taxation year and for all subsequent taxation years
unless revoked with the concurrence of the Minister under new subsection 10.1(2).
For more information, see the commentary on new subsections 10.1(2) and (4) and the definition
“eligible derivative” in new subsection 10.1(5).

Revocation
ITA
10.1(2)
New subsection 10.1(2) of the Act provides that the Minister of National Revenue may, on
application by the taxpayer in prescribed form, grant permission to the taxpayer to revoke an
election made under new subsection 10.1(1).
A revocation applies to each taxation year of the taxpayer that begins after the day on which the
taxpayer is notified in writing that the Minister concurs with the revocation and is subject to such
terms and conditions as are specified by the Minister. Where such notice is received in the same
taxation year in which request to revoke the election is made, new subsection 10.1(4) will
continue to apply – and an electing taxpayer will be required to stay in the mark-to-market
regime – until the end of that taxation year.
For more information, see the commentary on new subsections 10.1(1) and (4).