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Ottawa, November 20, 1996
1996-084

Income Tax Amendments Introduced

Related documents:

• Backgrounder.
• Notice of Ways and Means Motion : Income Tax Amendments Act, 1996 (Adobe Acrobat Version - 1,845,334 bytes).
• Revised Explanatory Notes to a Ways and Means Motion Amending the Income Tax Act and Related Acts (Adobe Acrobat format -136, 531 bytes.

Finance Minister Paul Martin today tabled a Notice of Ways and Means Motion in the House of Commons to implement the draft technical amendments to the Income Tax Act and related statutes originally released on April 26, 1995.

The Minister noted that the many helpful comments and suggestions received from the public had been taken into account in preparing the final legislation.

The Motion tabled today replaces the Notice of Ways and Means Motion tabled on June 20, 1996. A small number of measures that were included in the June 1996 Motion have been eliminated as they can be dealt with more conveniently in the legislation that will implement the March 1996 federal budget. The eliminated measures are amendments to:

• subsection 127.1(1) (dealing with the date on which the refundable investment tax credit is credited for a taxpayer),
• the definition "net tax owing" in section 156.1 (dealing with the exemption to pay tax instalments), and
• paragraphs 157(2)(c) and (2.1)(a) (dealing with the obligation of taxpayers to pay tax instalments).

Due to the modifications made to the amendments, the explanatory notes which accompanied the tabling of last June's Notice of Ways and Means Motion were revised in part. Attached to the press release is a backgrounder which highlights some of the more significant amendments.

_____________________
For further information:

Tax Legislation Division
(613) 947-7092

Backgrounder

The draft amendments to the Income Tax Act deal with a wide variety of unrelated matters. The following note describes those items of greater significance.

Loss Trading

The proposed amendments address the utilization of losses by what are termed "affiliated" parties where property is transferred between them. The amendments, which generally apply to transfers of property that take place after April 26, 1995, simplify the rules and curtail the transferability of such losses.

Treatment of Bankrupt Individuals

Amendments are being proposed to replace the provisions of the Income Tax Act that allow bankrupt individuals to claim certain personal tax credits twice in the year of bankruptcy with provisions that require credits to be pro-rated between the pre- and post-bankruptcy periods. These amendments, which apply to bankruptcies that occur after April 26, 1995, also ensure that income from both periods will be considered in determining the child tax benefit and GST credit.

Farmers' Prepaid Expenses

These proposed amendments ensure that capital costs cannot be converted into up-front deductions by, for example, the prepayment of rents on long-term leases. The effect of these changes, which generally apply to amounts paid after April 26, 1995, is to defer the deduction of the portion of prepaid expenses that relates to a taxation year that is two or more years after the year of the payment.

Changes to Tax Status of Corporations

These proposed amendments clarify the rules applying where a corporation becomes or ceases to be exempt from tax. They eliminate the carry-over of losses, deductions and credits by a corporation from a tax-exempt period to a taxable period and clarify that the Large Corporations Tax and certain other taxes apply to Crown corporations (with effect as of the date on which those taxes were introduced).

Tax Shelters

These proposed amendments include measures to prevent abuses through aggressive tax shelter promotions by affecting limited-recourse financing, extending the income base on which the alternative minimum tax is calculated and modifying the tax shelter identification rules. They were first announced in a release on December 1, 1994. Draft legislation to implement the measures was made available for consultation in the package of technical amendments released on April 26, 1995 and in a release dated December 14, 1995.

Disability Benefits - Top-ups

These proposed measures were first announced in a release on October 4, 1994. They ensure that there will be no change in the income tax treatment to recipients of disability benefits where the insurance company paying the benefits becomes insolvent and employers take responsibility for continuing the current level of payments.

Securities Held by Financial Institutions

The proposed legislation includes amendments affecting the tax treatment of securities held by financial institutions. The amendments, which were first announced in a Release dated June 1, 1995, would implement a number of modifications, most of which are relieving in nature, to the Income Tax Act provisions originally introduced following the 1994 budget.

Foreign Property Limits for Deferred Income Plans

These proposed measures were first announced in a release on July 20, 1995 and in revised form in a release on December 13, 1995. They address uncertainties with respect to the existing rules on investments in foreign property by deferred income plans and seek to ensure that shares and indebtedness issued by Canadian companies will not be "foreign property" only if the issuer has a substantial presence in Canada.

Adventures in the Nature of Trade

These proposed amendments implement the measures announced by the Minister of Finance on December 20, 1995 requiring that, for income tax purposes, inventory held as an adventure or concern in the nature of trade must be valued at its historical cost, rather than at the lower of cost or fair market value. Generally, this means that accrued losses on such property may be recognized only on disposition. These amendments also include anti-avoidance rules deferring the recognition of a loss where such property is transferred to a non-arm's length person, in a manner similar to the stop-loss rules referred to above.

Divisive Reorganizations

These proposed amendments provide that the avoidance rule in subsection 55(2) of the Income Tax Act will not apply to a dividend received by a corporation on a share acquired by it as consideration for the transfer of property to a related corporation under subsection 85(1) of the Act where the property is subsequently sold to an unrelated person for fair market value proceeds. The amendments also provide changes to the computation of what is commonly referred to as "safe income". Dividends paid out of safe income are not subject to subsection 55(2).

Vertical Amalgamations

This proposed amendment provides that the new corporation formed on the amalgamation of a parent corporation and a subsidiary corporation may increase its cost of certain capital property acquired by it from the subsidiary on the amalgamation. This increase is the amount that would have been available if the subsidiary had been wound-up into the parent and subsection 88(1) of the Income Tax Act had applied to the winding-up.

Winding-up of a Corporation

These proposed amendments modify the definition of "ineligible property" in subparagraph 88(1)(c)(vi) of the Income Tax Act to include any property distributed to the parent corporation on the winding-up of the subsidiary corporation where such property is subsequently acquired by certain persons who were shareholders of the subsidiary before the parent acquired control of it. The cost of ineligible property may not be increased on a winding-up of a subsidiary corporation.

Ammonite Gemstone

It is proposed that deposits of ammonite gemstone qualify as a "mineral resource" for the purpose of the Act. This proposal was released by press release on August 13, 1996 and is reflected in amendments to the definitions "mineral" and "mineral resource" in subsection 248(1).