Canada Gazette

These amendments to the Income Tax Regulations (the Regulations) implement income tax measures announced in the 2004 and 2005 budgets. The amendments also make technical refinements to the existing regulatory structure. The amendments relate to the income tax rules that apply to mining taxes, qualified investments for registered plans, the medical expense tax credit, stock options and registered pension plans.

Part XXXIX of the Regulations provides rules for determining the portion of mining taxes based on income that is eligible for a deduction under paragraph 20(1)(v) of the Income Tax Act (the Act). Subsection 3900(3) of the Regulations defines an eligible tax for this purpose.

Subparagraph 3900(3)(b)(ii) is amended to replace the requirement that the tax be imposed "only" on persons who hold a non-Crown royalty on mining operations with a requirement that the tax be imposed "specifically" on persons who hold a non-Crown royalty on mining operations. This amendment is intended to ensure that the eligible tax need not be imposed exclusively on amounts received or receivable by persons under a non-Crown royalty, provided that the tax is imposed specifically on those persons. Accordingly, a tax that is imposed under a provincial mining tax statute on persons who receive amounts under a non-Crown royalty that is also imposed on persons who dispose of certain rights in a mining property could qualify as an eligible tax that is deductible under paragraph 20(1)(v) of the Act.

This amendment applies to taxes paid or payable in taxation years that end after 2002.

Part XLIX of the Regulations lists a number of qualified investments for registered retirement savings plans and other registered plans. Paragraph 4900(1)(j.2) of the Regulations provides that certain investment-grade mortgage certificates are qualified investments.

Paragraph 4900(1)(j.2) is amended to ensure that a mortgage certificate will not lose its qualified investment status if a mortgage that was registered in connection with the certificate is released in exchange for the provision of other high-quality substitute security. This amendment applies after 2005.

Part LVII of the Regulations prescribes, for the purpose of paragraph 118.2(2)(m) of the Act, medical devices or equipment that are eligible for the medical expense tax credit (METC) under section 118.2 of the Act.

Paragraph 5700(w) of the Regulations includes, in the list of medical devices or equipment that are eligible for the METC, a "talking textbook" if it has been prescribed by a medical practitioner for use by an individual with a perceptual disability in connection with the individual's enrolment at an educational institution in Canada. As announced in Budget 2004, paragraph 5700(w) is amended to extend eligibility for talking textbooks acquired by such individuals enrolled at a designated educational institution, which includes foreign universities. This amendment ensures that the eligibility requirements for talking textbooks are generally consistent for both the disability supports deduction in section 64 of the Act and the METC. This amendment applies to the 2004 and subsequent taxation years.

Paragraph 5700(i) of the Regulations is amended to ensure that only a device that is exclusively designed to assist an individual in walking where the individual has a mobility impairment is prescribed as a medical device eligible for the METC. Further, in order to be eligible, the device must have been prescribed by a medical practitioner. This amendment applies to expenses incurred in respect of property acquired after February 22, 2005.

The following are new medical devices and equipment prescribed for the purpose of paragraph 118.2(2)(m) of the Act that will be eligible for the METC if those devices and equipment have been prescribed by a medical practitioner:

Part LXII of the Regulations sets out, among other things, the requirements that must be met for an employee stock option share to qualify as a prescribed share for the stock option deduction under paragraph 110(1)(d) of the Act.

A number of the eligibility requirements in subsection 6204(1) of the Regulations relate to rights and obligations to redeem, acquire or cancel the share. Paragraph 6204(2)(c) allows such rights and obligations to be ignored for the purposes of subsection 6204(1) if, among other things, the right or obligation is provided for in the employee share purchase agreement under which the share is acquired. Paragraph 6204(2)(c) is amended to allow the right or obligation to be provided for in any agreement in respect of the share or its issue, or in the terms or conditions of the share. This will accommodate, for example, share liquidity rights that are provided for in a shareholders agreement, rather than in the employee share purchase agreement. Amended paragraph 6204(2)(c) applies to shares that are sold or issued, and to share acquisition rights that are disposed of, after 2003.

A proposal, released in draft on March 16, 2001, to add to subsection 6204(1) a reference to section 44.1 of the Act will not be pursued. This addition is unnecessary, given that the provisions of the Act already cross-reference to that subsection. However, the French version of that subsection is amended to replace "action prescrite" by "action visée," the latter expression being now found in the French version of paragraph 110(1)(d) of the Act.

Part LXXXV of the Regulations prescribes conditions that must be satisfied in order for a pension plan to be registered under the Act. It also includes rules providing that certain employer contributions to defined benefit provisions of registered pension plans (RPPs) are eligible contributions for the purposes of subsection 147.2(2) of the Act.

Part LXXXV is amended to address certain tax aspects arising out of recent regulatory changes made under the Supplemental Pension Plans Act (SPPA) of the Province of Quebec. These regulatory changes permit the establishment of a new type of defined benefit pension plan, referred to as a member-funded pension plan (MFPP).

One of the key features of the MFPP is that the financial risk is borne entirely by the members of the plan, rather than by the employer. Under an MFPP, plan members are fully responsible for any funding deficiencies and are fully entitled to any surplus. The employer's financial obligation is limited to making fixed contributions at a pre-determined rate that generally will not vary with the financial performance of the plan. In effect, the MFPP represents a reversal in the traditional funding roles for employers and plan members. In this regard, the SPPA Regulations set out specific requirements relating to funding and benefits that will serve to minimize the potential for the excessive build-up of surplus or the formation of deficiencies under an MFPP. These requirements are intended to provide a degree of stability in member contributions in order to ensure the long-term viability of these plans.

New subsection 8510(9) of the Regulations is introduced to modify certain of the defined benefit rules in Part LXXXV as they apply to a pension plan that is an MFPP, as defined in the SPPA Regulations.

Currently, the income tax rules require that employer contributions cease when a defined benefit RPP has excess surplus (generally more than 10% of liabilities, as determined under paragraph 147.2(2)(d) of the Act), but impose no such restriction on member contributions. New subsection 8510(9) partly reverses these rules by permitting some employer contributions, while prohibiting further member contributions, when an MFPP has excess surplus.

More specifically, subsection 8510(9) provides that employer contributions to an MFPP throughout any period in which the MFPP has excess surplus are eligible contributions for the purposes of subsection 147.2(2) of the Act, provided that the contributions do not exceed 50% of current service costs. In addition, subsection 8510(9) requires the terms of an MFPP to limit member contributions to the maximum amount eligible under the income tax rules for employer contributions to a traditional defined benefit RPP. Consequently, member contributions will have to cease when an MFPP has excess surplus.

It should be noted that subsection 8510(9) does not exempt MFPPs from also having to satisfy the limits on member contributions in existing paragraph 8503(4)(a) and subsection 8503(5) of the Regulations. In applying these rules, existing subsection 8501(6.1) of the Regulations would apply to treat member contributions to fund a deficit as regular member current service contributions. Depending on the size of the deficit and the regular member current service contribution rate, these rules may limit the amount of contributions that members may make to an MFPP.

These amendments apply after the day on which their text is published in the Canada Gazette, Part I.

The SPPA Regulations, as well as previous regulatory changes under the SPPA, contemplate circumstances in which an RPP could be required to make a payment to a member that is not accommodated under existing income tax rules. To resolve this potential conflict, the permissible distribution rule in paragraph 8502(d) of the Regulations is amended to allow an RPP to make a cash payment with respect to a member if the payment is required to be made to comply with federal or provincial pension benefits legislation. This amendment applies to payments made after March 20, 2002.

No alternatives were considered. These amendments implement measures announced in the 2004 and 2005 budgets and make technical refinements to the existing regulatory framework.

The amendments to the rules relating to mining taxes, qualified investments and stock options address technical concerns. The amendments to the METC eligibility list implement measures announced in the 2004 and 2005 budgets. The amendments to the RPP rules avoid conflicts with provincial pension benefits legislation. The revenue implications associated with all of these amendments are expected to be minimal.

These amendments were developed in consultation with the Canada Revenue Agency and other interested parties.

The qualified investment amendment was developed in consultation with representatives of issuers of mortgage-backed securities.

The amendments to the METC eligibility list were announced in the 2004 and 2005 budgets. The amendment relating to talking textbooks was also released in draft form, together with explanatory notes, by the Department of Finance on September 16, 2004.

The amendments to section 6204 were developed in response to representations made by tax advisors.

The amendments to the RPP rules were developed in consultation with officials of the Régie des rentes du Québec.

The Income Tax Act provides the necessary compliance mechanisms for these amendments. The Act allows the Minister of National Revenue to conduct audits, to seize relevant documents and records and to assess and reassess tax, interest and penalties payable.

Dave Wurtele
Tax Legislation Division
Department of Finance
L'Esplanade Laurier
140 O'Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-4390

Notice is hereby given that the Governor in Council, pursuant to subsection 147.1(18) (see footnote a) and section 221 (see footnote b) of the Income Tax Act (see footnote c), proposes to make the annexed Regulations Amending the Income Tax Regulations (Omnibus Amendments – 2007).

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to David Wurtele, Tax Legislation Division, Department of Finance, L'Esplanade Laurier, 17th Floor, East Tower, 140 O'Connor Street, Ottawa, Canada K1A 0G5.

1. Subparagraph 3900(3)(b)(ii) of the Income Tax Regulations (see footnote 1) is replaced by the following:

2. Subparagraph 4900(1)(j.2)(i) of the Regulations is replaced by the following:

(i) all or substantially all of the fair market value of the certificate is attributable to property that is, or is incidental to, a debt obligation secured by

(A) a mortgage, charge, hypothec or similar instrument in respect of real or immovable property situated in Canada, or

(B) property described in paragraph (a) or (b) of the definition "qualified investment" in section 204 of the Act that was substituted for the security referred to in clause (A) under the terms of the debt obligation,

(i) device that is exclusively designed to assist an individual in walking where the individual has a mobility impairment;

(2) Section 5700 of the Regulations is amended by adding the following after paragraph (l):

(l.1) device or software designed to be used by a blind individual, or an individual with a severe learning disability, to enable the individual to read print;

(w) talking textbook for use by an individual with a perceptual disability in connection with the individual's enrolment at an educational institution in Canada, or a designated educational institution;

(4) Section 5700 of the Regulations is amended by striking out the word ''and'' at the end of paragraph (v) and by adding the following after paragraph (w):

(x) Bliss symbol board, or similar device, designed to be used to help an individual who has a speech impairment communicate by selecting the symbols or spelling out words;

(y) Braille note-taker designed to be used by a blind individual to allow them to take notes (that can be read back to them or printed or displayed in Braille) with the help of a keyboard; and

(z) page turner, designed to be used by an individual who has a severe and prolonged impairment that markedly restricts their ability to use their arms or hands to turn the pages of a book or other bound document.

4. (1) The portion of subsection 6204(1) of the French version of the Regulations before paragraph (a) is replaced by the following:

6204. (1) Pour l'application de l'alinéa 110(1)d) de la Loi, une action est une action visée du capital-actions d'une société à la date de sa vente ou de son émission, selon le cas, si à cette date :

(2) Subparagraph 6204(1)(a)(iii) of the French version of the Regulations is replaced by the following:

(iii) l'action ne peut être convertie en une autre valeur, sauf s'il s'agit d'une valeur de la société ou d'une autre société avec laquelle elle a un lien de dépendance qui est une action visée ou qui le serait à la date de la conversion,

(3) Paragraph 6204(1)(c) of the French version of the Regulations is replaced by the following:

c) il n'est pas raisonnable de s'attendre à ce que les modalités de l'action ou une convention concernant l'action ou sa vente ou son émission soient modifiées, ou à ce qu'une nouvelle convention concernant l'action, sa vente ou son émission soit conclue, dans les deux ans suivant la date de la vente ou de l'émission de l'action, de telle sorte que l'action n'aurait pas été une action visée si elle avait été vendue ou émise à la date d'une telle modification ou à la date où la nouvelle convention est conclue.

(c) the determination of whether a share of the capital stock of a particular corporation is a prescribed share shall be made without reference to a right or obligation to redeem, acquire or cancel the share, or to cause the share to be redeemed, acquired or cancelled, where

(i) the person (in this paragraph referred to as the "holder") to whom the share is sold or issued is, at the time the share is sold or issued, dealing at arm's length with the particular corporation and with each corporation with which the particular corporation is not dealing at arm's length,

(ii) the right or obligation is provided for in the terms or conditions of the share or in an agreement in respect of the share or its issue and, having regard to all the circumstances, it can reasonably be considered that

(A) the principal purpose of providing for the right or obligation is to protect the holder against any loss in respect of the share, and the amount payable on the redemption, acquisition or cancellation (in this subparagraph and in subparagraph (iii) referred to as the "acquisition") of the share will not exceed the adjusted cost base of the share to the holder immediately before the acquisition, or

(B) the principal purpose of providing for the right or obligation is to provide the holder with a market for the share, and the amount payable on the acquisition of the share will not exceed the fair market value of the share immediately before the acquisition, and

(iii) having regard to all the circumstances, it can reasonably be considered that no portion of the amount payable on the acquisition of the share is directly determinable by reference to the profits of the particular corporation, or of another corporation with which the particular corporation does not deal at arm's length, for all or any part of the period during which the holder owns the share or has a right to acquire the share, unless the reference to the profits of the particular corporation or the other corporation is only for the purpose of determining the fair market value of the share pursuant to a formula set out in the terms or conditions of the share or the agreement in respect of the share or its issue, as the case may be.

5. The portion of subsection 8501(6.1) of the Regulations before paragraph (a) is replaced by the following:

(6.1) For the purposes of the conditions in this Part (other than subparagraph 8510(9)(b)(i)), a contribution made by a member of a pension plan in respect of a defined benefit provision of the plan is deemed to be a current service contribution made by the member in respect of the member's benefits under the provision if

6. Paragraph 8502(d) of the Regulations is amended by striking out the word ''or'' at the end of subparagraph (vii), by adding the word ''or'' at the end of subparagraph (viii) and by adding the following after subparagraph (viii):

(ix) a payment, other than a payment described in subparagraph (i), with respect to a member of a single amount that the plan is required to make because of the Pension Benefits Standards Act, 1985 or a similar law of a province, where the single amount is not transferred directly to another registered pension plan, a registered retirement savings plan or a registered retirement income fund;

7. The heading "Multi-employer Plans and Specified Multi-employer Plans" before section 8510 of the Regulations is replaced by the following:

8. Section 8510 of the Regulations is amended by adding the following after subsection (8):

(9) Where a pension plan (other than a specified multi-employer plan) is a member-funded pension plan for the purposes of Division IX of the Regulation respecting the exemption of certain categories of pension plans from the provisions of the Supplemental Pension Plans Act of Quebec (R.Q., c. R.-15.1, r. 2), as amended from time to time,

(a) paragraph 8502(c) shall in its application in respect of the plan be read without reference to subparagraph (iii);

(b) the prescribed conditions for the registration of the plan include the following conditions:

(i) the plan terms are such that each contribution to be made by a member under a defined benefit provision of the plan would be an eligible contribution under subsection 147.2(2) of the Act if

(A) the contribution were made by an employer who participates in the plan for the benefit of the member, and

(B) this subsection were read without reference to paragraph (c),

(ii) unless this condition is waived by the Minister, the plan is maintained pursuant to a collective bargaining agreement,

(iii) the plan is not, and it is reasonable to expect that the plan will not become, a designated plan, and

(iv) the amount of benefits provided to members, the amount of contributions required to be made by members and the entitlement of members' to benefit from actuarial surplus are determined in a manner that is

(A) clearly established in the plan terms, and

(B) not more advantageous for members who, at any time after the plan is established, are specified individuals (within the meaning assigned by subsection 8515(4)) under the plan than for members who are not specified individuals; and

(c) a contribution made by an employer to the plan is a prescribed contribution for the purposes of subsection 147.2(2) of the Act if

(i) the contribution is a current service contribution that would be an eligible contribution under subsection 147.2(2) of the Act if no contributions were prescribed for the purposes of that subsection and if that subsection were read without reference to its subparagraphs (d)(ii) and (iii), and

(ii) the recommendation pursuant to which the contribution is made is such that the current service contributions to be made by the employer do not exceed,

(A) where the amount of actuarial surplus in respect of the employer is greater than the greater of the amounts determined under subparagraphs 147.2(2)(d)(ii) and (iii) of the Act, 50% of the current service contributions that would be required to be made by the employer if there were no actuarial surplus under the provisions, and

(B) in any other case, the current service contributions that would be required to be made by the employer if there were no actuarial surplus under the provisions.

9. (1) Section 1 applies to taxes paid or payable in taxation years that end after 2002.

(3) Subsection 3(1) applies to expenses incurred for property acquired after February 22, 2005.

(4) Subsections 3(2) and (4) apply to the 2005 and subsequent taxation years.

(6) Subsections 4(1) to (3) and sections 5, 7 and 8 apply after the day on which their text is published in the Canada Gazette, Part I.

(7) Subsection 4(4) applies to shares that are sold or issued, and to rights to acquire shares that are disposed of, after 2003.