Tag Archives: Canada

Selected Tax Measures in the Federal Budget 2018 – Canada

This update is intended for those seeking additional insights into the 2018 Federal Budget including its impact on both domestic and multinational enterprises.

The Minister of Finance (Canada), the Honourable Bill Morneau, presented the Government of Canada’s (the “Federal Government”) 2018 Federal Budget (“Budget 2018″) on February 27th, 2018 (“Budget Day”). Budget 2018 contains significant proposals to amend the Income Tax Act (Canada) (the “ITA”) and the Excise Tax Act (the “ETA”) while also providing updates on previously announced tax measures and policies.

Significant Budget 2018 proposals and updates include:

  • Introduction of simplified measures (compared to the July 2017 proposals) applicable to passive investment income in a private corporation that will: (i) limit access to the small business rate for small businesses with significant passive savings, and (ii) limit access to refundable taxes for larger Canadian-controlled private corporations (“CCPCs”).
  • Rules applicable to equity-based financial arrangements including synthetic equity arrangements and securities lending arrangements.
  • Rules to prevent tax-free distributions by Canadian corporations to non-resident shareholders through the use of certain transactions involving partnerships and trusts.
  • Modification of the foreign affiliate provisions so certain rules cannot be avoided through the use of “tracking arrangements”.
  • Updates on Canada’s participation in the Organisation for Economic Co-operation and Development (“OECD”) project on Base Erosion and Profit Shifting (“BEPS”).

Our full analysis of selected proposals and tax measures can be found on Fasken.com.


Canada’s Cannabis Taxation Regime

photo-1503262167919-559b953d2408There has been much speculation on how Canada will tax cannabis, which is expected to be legalized for retail sale in Canada by July 2018.  The much anticipated draft tax legislation was released by the Department of Finance on Friday November 10, 2017, and is out for consultation until December 7, 2017.

Proposed Tax Regime

Under the proposed cannabis tax regime, most supplies of cannabis will be subject to GST/HST (at rates currently ranging from 5-15% across Canada).  Cannabis, both for recreational or medical use, will also be taxed under the Excise Act, 2001 (Canada) (the “Act”), which currently imposes federal excise duty on spirits, wine and tobacco product made in Canada.  Both taxes on cannabis will be administered by the Canada Revenue Agency.

Similarly to the current GST/HST regime, the provinces and territories will be offered the option of joining the federal tax regime for cannabis taxation, in which case the excise duty on cannabis will be made up of the federal rate, plus an additional rate for the participating province or territory.  The division of tax revenues is currently under discussion between the federal government and the provinces, which will be responsible for controlling the distribution and retail sales of cannabis in each province.  In this regard, the federal government has indicated its goal of setting the maximum total excise duty rate at the greater of $1 per gram or 10 per cent of the sale price of the product.

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New Proposals on the Taxation of Private Corporations can result in Double Taxation

ottawa-815375_1920Much has been written regarding the proposals released by the Department of Finance on July 18, 2017 to limit income splitting and holding passive investments inside a private corporation.[1]  A third measure, namely, placing limits on the conversion of income to capital gains is aimed at preventing an individual selling shares of a corporation to a non-arm’s length person followed by a sale by the non-arm’s length person to a connected corporation.  The foregoing transaction would result in the individual realizing a capital gain based on the fair market value of the transferred share followed by the tax-free extraction of corporate surplus of the transferred corporation.  This is considered an inappropriate conversion of what would otherwise be a payment of dividend income into a capital gain.  The difference in tax rates is about 14%.

The problem is in the application.  Discussions with officials from the Department of Finance indicate that these proposals will prevent some normal post death tax planning aimed at preventing double taxation of the same economic gain (the “pipeline plan”).

The pipeline plan is illustrated in the following example:  Taxpayer A incorporates a company and invests $100 for shares of the company.  The company starts a business or buys investments for $100.  Ten years later the shares of the company are worth $5 million.  Taxpayer A dies, a capital gain of $4,999,900 is realized.  However, the cost of the assets or investments in the company remains at $100.  Thus, if the assets or the investments are sold for $5 million, there is a gain of the same $4,999,900, i.e., the same gain is taxed twice, once in the hands of the deceased taxpayer and once in the hands of the company.  To prevent this economic double taxation, the shares of the company are sold by the estate of Taxpayer A to a new corporation for the same $5 million which then is amalgamated with the company.  The tax result is that the cost base of the assets in the amalgamated company and paid-up capital of the shares of the amalgamated company is increased to $5 million.  This prevents double taxation of the same gain.

Yet, the Department of Finance officials have indicated that the pipeline plan is not available because the transfer of the shares from the deceased Taxpayer A to his estate is a non-arm’s length transfer that is caught by the new proposal.  It is a stretch to think of death as a “specific type of avoidance transaction”.

There is a procedure available to deal with the double taxation issue but there is a stringent time requirement which often causes such a procedure to not be available.[2]

The Minister of Finance should heed the words of Shakespeare “Striving to do better, oft we mar what’s well”.  At a bare minimum, the Minister should announce that these rules will not affect pipeline transactions.


[1]       See also our commentary on the proposal, “Targeting Private Corporation Tax Planning: the Canadian Federal Government’s Proposal“.

[2]       Namely, making an election pursuant to subsection 164(6).


Five Fasken Martineau Partners make the 2017 Tax Controversy Leader’s list

The 7th edition of the International Tax Review guide mentioned five partners of Fasken as leading tax dispute resolution lawyers in Canada. This prestigious recognition is based on their outstanding success in the past year and consistently positive feedback from peers and clients.

The five partners that made the Tax Controversy Leader’s list of 2017 are :

Congratulations to the listed partners!


Cinq associés Fasken Martineau figurent dans la liste des chefs de file en litige fiscal

businessman-2056022_1920La 7e édition du répertoire International Tax Review fait mention de cinq associés de Fasken à titre de chefs de file dans le domaine du contentieux fiscal au Canada. Cette reconnaissance prestigieuse est basée sur leur succès remarquable au cours de la dernière année et des commentaires positifs de pairs et de clients.

Les cinq associés figurant dans la liste des chefs de file en litige fiscal de 2017 sont :

Félicitations aux associés nommés!