The announcement of a federal election slated for October 14, 2008, puts the enactment of any outstanding proposed tax legislation in question. Following an election call, Parliament is dissolved and bills that have not received Royal Assent “die on the Order Paper.” In practice, tax bills have generally been reintroduced by the new government, even if a new party is in power, but there can be significant delays. Proposed tax legislation is also generally enacted as well; however, with a change in government, there is the possibility that some changes will be made to proposed legislation.

Elected in January 2006, the Conservative government delivered two budgets and one mini-budget. Most of the tax legislation proposed in these budgets has become law. The tax legislation of their last budget, tabled on February 26, 2008, was contained in Bill C-50, which received Royal Assent on June 18, 2008 (S.C. 2008, c. 28). Therefore, most of the tax measures of this budget, including tax-free savings accounts, enhancements to the SR&ED program and the reduction of  the tax withholding and return filing requirement of section 116 for a non-resident’s disposition of treaty-protected property have become law. The significant budget measures not included in Bill C-50 were the proposed changes to capital cost allowance (CCA), which would benefit the manufacturing and certain “clean” energy sectors. To date, the details of these proposed changes have not been included in a bill and could also be at risk pending the outcome of the upcoming election.

The Fifth Protocol which makes changes to the Canada-U.S. tax treaty was ratified by Canada on December 14, 2007. An Act to amend the Canada-United States Tax Convention Act, 1984 received Royal Assent on December 14, 2007 (S.C. 2007, c. 32). The Protocol is awaiting signature by the United States and its implementation will not be affected by the Canadian election.

On July 14, 2008, the Department of Finance released proposed legislation that included most of the remaining tax measures from the 2008 budget proposals, some new legislation and certain international tax changes. Specifically, the significant items of the proposed legislation include:

• Amendments to the definition of the general rate income pool (GRIP) to reflect the continuing reduction of the general corporate tax rate.
• Minor adjustments to the tax-free savings account rules and scientific research and experimental development investment tax credit rules.
• Clarification of the excess corporate holdings regime introduced in the 2007 budget to address concerns that persons connected with private foundations may have influence that they could use to their own benefit.
• New subsections 85.1(7) and 85.1(8) to allow for the tax-deferred exchange of an interest in a specified investment flow through (SIFT) trust for a share of a corporation to facilitate the conversion of SIFT trusts to corporations.
• Changes to definitions to carve-out entities that were not intended to be treated as SIFTs that were inadvertently caught by the legislation of October 31, 2006.
• Rules regarding the income of financial institutions from certain mark-to-market properties, policy reserves that are deductible by insurance corporations and the minimum tax for Canadian-resident life insurance corporations.  Most of these proposals were originally released in November 2007 and analyzed in our Tax Alert dated November 19, 2007.
• Extension of the carryforward period for unused investment tax credits from 10 years to 20 years.
• Amendments that relate to the computation of income and capital gains by foreign affiliates which was included in the October 2, 2007, draft legislation but was not included in Bill C-28, which passed in December 2007. These amendments are important and contain an election to apply the amendments retroactively to three possible dates, should the taxpayer so choose. Taxpayers should begin to consider whether the election will be helpful and for what years since the decision may not be easy to make.
• A new technical rule supporting previous revisions to paragraphs 95(2)(a) and (g) to deem an affiliate to be a controlled foreign affiliate for purposes of those rules throughout a taxation year if the affiliate begins to be or ceases to be a controlled foreign affiliate during the year.

In its release, the Department of Finance indicated that these draft amendments were expected to be included in a legislative bill to be introduced later this year. With the calling of an election, these items may reach the stage of a bill only after a long delay.

Bill C-10, formerly Bill C-33, was the only bill prepared by the Department of Finance that was still outstanding. Most of the legislation contained in this bill related to amendments proposed prior to the election of the current government. The significant legislation contained in this bill included:

• The proposed amendments dealing with non-resident trusts and foreign investment entities. These amendments were first announced in the 1999 budget and follow the draft legislation released for comment in 2005 with some changes.
• New legislation dealing with the taxation of amounts that are received or receivable with respect to a restrictive covenant. These rules were initially announced in October 2003.
• Amendments to the Canadian Film or Video Production Tax Credit including the ineligibility of labour expenditures of non-residents of Canada (other than Canadian citizens) for the credit. These amendments were originally announced November 2003.

Some of the measures of this bill, such as the non-resident trust rules and the proposed changes to the film production credit, were controversial and caused the bill to be stalled by the Senate. It is possible that these items may not be reintroduced after the election due to the controversy surrounding these measures.

Also outstanding was the private member’s bill, Bill C-253, concerning the deductibility of RESP contributions. Should that bill have been enacted, it was already provided that it would have been repealed by the now enacted Bill C-50. Bill C-253 therefore will most likely not be reintroduced.

While the current government has enacted most of its budget measures, there is still significant proposed legislation outstanding, the enactment of which is uncertain. Look to future issues of TaxBreaks for updates.

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