Weekly tax highlights, November 24, 2011
November 24, 2011
TIEA update: Bahamas, and St. Kitts and Nevis
The Tax Information Exchange Agreement (TIEA) previously concluded between Canada and the Commonwealth of The Bahamas entered into force on November 17, 2011. The TIEA previously concluded between Canada and the Federation of Saint Christopher (St. Kitts) and Nevis entered into force on November 22, 2011.
TIEAs provide for the mutual exchange of tax information with a view to better administering and enforcing taxation laws and preventing international fiscal evasion. As well, the Income Tax Regulations were amended in 2008 to extend to countries with which Canada has a TIEA certain favourable corporate tax provisions that had previously only been available to countries with which Canada has concluded a tax treaty. These incentives provide that if a jurisdiction enters into a TIEA with Canada, active business income earned by a foreign affiliate of a Canadian corporation that is resident in that jurisdiction and carrying on business there will be included in “exempt surplus” and, consequently, dividends paid to the Canadian corporation from the affiliate will not be subject to Canadian tax. The Regulations provide that a foreign affiliate of a Canadian company that is resident in a country which has entered into a TIEA with Canada can earn exempt surplus in respect of active business income for its taxation year that includes the effective date of the particular TIEA, retroactive to the beginning of the taxation year. Thus, a foreign affiliate in the Bahamas or in St. Kitts and Nevis, that has a taxation year based on the calendar year, will be eligible to earn exempt surplus for its entire 2011 taxation year.
For more information on Canada’s TIEAs, please see our previous Alert. For a list of jurisdictions with which Canada has entered into a TIEA or with which negotiations are ongoing, please see the Department of Finance website.
Prohibited Investment Rules – impact on investment funds
Draft legislation released on October 3, 2011 (now contained in Bill C-13) would extend the “prohibited investment” rules to registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) (collectively, “registered plans”). These rules, which already affect tax free savings accounts (TFSAs), will apply to investments held on, or acquired after, March 22, 2011 by a registered plan.
The prohibited investment rules were introduced by the Department of Finance to address concerns they have regarding certain types of investments that have been acquired by registered plans. The scope of the rules is very broad and they arguably catch many investments that are not the target of the rules. Specifically, investments in mutual funds, hedge funds and other investment funds that are otherwise RRSP-eligible may be inadvertently caught by the rules. Many investors as well as employees or principals of the managers that offer these funds to the public will be surprised to learn that they currently have prohibited investments in their registered plans.
Read more in our Canadian Tax Alert.
Ontario’s Speech from the Throne and Fall Economic Outlook focus on jobs, economy
On November 22, 2011, the Honourable David C. Onley, Lieutenant Governor of Ontario, delivered the Speech from the Throne. The speech centred on the government's plan to help create jobs and strengthen the province’s economy. Here are some of the highlights:
- The government is committed to balancing its budget by 2017-2018 and expects a deficit of $16.0 billion for the current fiscal year
- The government is projecting only modest economic growth, and in the next few months will be reviewing a report from the Commission on the Reform of Ontario’s Public Services, chaired by economist Don Drummond, which will make recommendations on ways to transform public services and eliminate the deficit
- Average college and university tuition will be reduced by 30% for families earning less than $160,000 per year
- A new Healthy Homes Renovation Tax Credit will be introduced to help seniors live independently longer and create jobs in the home renovation sector. Effective October 1, 2011, homeowners and tenants, 65 years of age or older by the end of the year for which the credit is claimed, and people who share a home with a senior relative, would be allowed to claim a refundable tax credit of up to $1,500 per year for expenses related to permanent modifications to the home. Expenses would be eligible only to the extent that they improve accessibility or help a senior be more functional or mobile at home. The credit would be calculated as 15% of up to $10,000 in total eligible expenses for a senior’s principal residence in Ontario for a calendar year, for a maximum credit of $1,500 each year. For the 2012 tax year only, the expenses paid or payable from October 1, 2011 to December 31, 2012 would be claimed on the 2012 income tax return. Additional information concerning this measure was released on November 23, 2011 in Ontario’s Economic Outlook and Fiscal Review
- Home care services for seniors will be increased to take pressure off hospitals and long-term care homes
- Commuter train service will be expanded
Pooled Registered Pension Plans – Tabling of Bill C-25
On November 17, 2011, the Department of Finance issued a release focusing on Pooled Registered Pension Plans (PRPPs). On the same day, legislation implementing the federal portion of the PRPP framework was introduced in Parliament, and the Pooled Registered Pension Plans Act received first reading as Bill C-25. PRPPs will allow individuals who currently do not participate in a pension plan, such as the self-employed and employees of companies that do not offer a pension plan, to benefit from a large-scale, low-cost pension plan. Tax rules for PRPPs are being developed by the government and will be first released as a draft for comment. Deloitte is reviewing the legislation and will provide insight in a Canadian Tax Alert in the near future.
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