Federal 2013-2014 Budget – Part 2: Business Income Tax Measures

The business income tax measures from the 2013-2014 Federal Budget are summarized below:

Manufacturing and Processing Machinery and Equipment: Accelerated CCA

The Budget proposes to extend the temporary support for investment in machinery and equipment for the manufacturing and processing sector by an additional two years. Manufacturing and processing machinery and equipment that would otherwise be included in Class 43 and that is acquired in 2014 or 2015 will qualify for the 50 percent straight-line CCA rate. Such eligible assets will be included in Class 29. Eligible assets acquired in 2016 and subsequent years will qualify for the regular 30-per-cent declining-balance rate and will be included in Class 43.

Clean Energy Generation Equipment: Accelerated Capital Cost Allowance

The Budget proposes to expand Class 43.2 by making biogas production equipment that uses more types of organic waste eligible for inclusion in Class 43.2. Budget 2013 also proposes to broaden the range of cleaning and upgrading equipment used to treat eligible gases from waste that is eligible for inclusion in Class 43.2.

Biogas Production Equipment – Eligible Organic Waste

The Budget proposes to expand the biogas production equipment that is eligible for inclusion in Class 43.2 by providing that more types of eligible organic waste can be used in qualifying biogas production equipment and specifically, to include pulp and paper waste and wastewater, beverage industry waste and wastewater (for example, winery and distillery wastes) and separated organics from municipal waste.

Cleaning and Upgrading Equipment – Biomethane

The Budget proposes to expand eligibility under Class 43.2 by removing restrictions, such that all types of cleaning and upgrading equipment that can be used to treat eligible gases from waste will be included in Class 43.2. This will ensure consistency in the tax treatment of the types of equipment that can be used in the production of biomethane.

Scientific Research and Experimental Development Program

The Budget proposes to require more detailed information to be provided on SR&ED program claim forms about SR&ED program tax preparers and billing arrangements. In particular, in instances where one or more third parties have assisted with the preparation of a claim, the Business Number of each third party will be required, along with details about the billing arrangements including whether contingency fees were used and the amount of the fees payable. In instances where no third party was involved, the claimant will be required to certify that no third party assisted in any aspect of the preparation of the SR&ED program claim. This information will facilitate the identification of SR&ED program claims with a higher risk of non-compliance. In order to support the requirement to provide more detailed information, the Budget proposes that a new penalty of $1,000 be imposed in respect of each SR&ED program claim for which the information about SR&ED program tax preparers and billing arrangements is missing, incomplete or inaccurate. In the case where a third-party SR&ED program tax preparer has been engaged, the SR&ED program claimant and tax preparer will be jointly and severally, or solidarily, liable for the penalty. This measure will apply to SR&ED program claims filed on or after the later of January 1, 2014 and the day of Royal Assent to the enacting legislation.

Mining Expenses

The Budget proposes that pre-production mine development expenses, as described in paragraph (g) of the definition CEE in subsection 66.1(6) of the Income Tax Act, be treated as CDE. The transition from CEE (100%) to CDE (30%) treatment will be phased in by 2017. Most machinery, equipment and structures used to produce income from a mine or an oil or gas project are currently eligible for a capital cost allowance (CCA) rate of 25 per cent on a declining-balance basis. The 25-per-cent rate also applies to assets that are used in the initial processing of oil or gas, or ore from a mineral resource. In addition to the regular 25 percent CCA deduction, accelerated CCA is provided for certain assets acquired for use in new mines or eligible mine expansions. The Budget proposes to phase out the additional allowance available for mining (other than for bituminous sands and oil shale, for which the phase-out will be complete in 2015). The additional allowance will be phased out over the 2017 to 2020 calendar years.

Reserve for Future Services

The Budget proposes to amend the Tax Act to ensure that the reserve for future services under paragraph 20(1)(m) cannot be used by taxpayers with respect to amounts received for the purpose of funding future reclamation obligations.

Additional Deduction for Credit Unions

Credit unions have access to a preferential income tax rate for income that is not eligible for the small business deduction. The Budget proposes to phase out the additional deduction for credit unions over five calendar years, beginning in 2013.

Leveraged Life Insurance Arrangements

In order to improve the integrity and fairness of the tax system, the Government is acting to eliminate multiple and unintended tax benefits relating to two leveraged life insurance arrangements commonly referred to as “leveraged insured annuities” and “10/8 arrangements”.

Restricted Farm Losses

The Budget proposes to amend them to codify the chief source of income test as interpreted in Moldowan. This amendment will clarify that a taxpayer’s other sources of income must be subordinate to farming in order for farming losses to be fully deductible against income from those other sources. Recognizing that the deductible limit under the RFL rules has not been increased since 1988, The Budget also proposes to increase the RFL limit to $17,500 of deductible farm losses annually ($2,500 plus ½ of the next $30,000).

Corporate Loss Trading

The Budget proposes to introduce an anti-avoidance rule to support the existing loss restriction rules that apply on the acquisition of control of a corporation. The rule will deem there to have been an acquisition of control of a corporation that has loss pools when a person (or group of persons) acquires shares of the corporation that have more than 75 percent of the fair market value of all the shares of the corporation without otherwise acquiring control of the corporation, if it is reasonable to conclude that one of the main reasons that control was not acquired is to avoid the restrictions that would have been imposed on the use of loss pools. Related rules are also proposed to ensure that this anti-avoidance rule is not circumvented.

Taxation of Corporate Groups

The examination of the taxation of corporate groups is now complete. The Government has determined that moving to a formal system of corporate group taxation is not a priority at this time. Going forward, the Government will continue to work with provinces and territories regarding their concerns about the uncertainty of the cost associated with the current approach to loss utilization.

 

See the related Supplementary Information and Notice of Ways and Means Motion (NWMM) for details of the 2013-2014 Federal Budget announced by the Federal Minister of Finance on March 21, 2013.

 

Tags: Article; Tax; William (Bill) H. Cooper