On March 21, 2013, Federal Minister of Finance, Jim Flaherty, introduced his government's "Economic Action Plan 2013". This year's budget was designed to build on the foundation that was formed with last year's budget by introducing affordable measures to create jobs, promote growth and support long-term prosperity. Accordingly, the budget looks to propel economic progress and prosperity by connecting Canadians with available jobs, helping manufacturers and businesses succeed in the global economy, creating a "New Building Canada Plan" that targets infrastructure projects focusing on job creation and economic growth, investing in world-class research, and supporting families and communities - all with the goal of expanding opportunities for Canadians to succeed and enjoy a high quality of life.
This year's budget proposes a number of interesting tax changes which have been summarized below.
Commodity Tax Measures
The federal government continues to introduce changes to ensure that the GST/HST legislation reflects the current state of health care services in Canada and operates as intended. In addition, this year's budget introduces a few measures designed to simplify compliance with the Excise Tax Act ("ETA").
Home and Personal Care Services
Under the GST/HST, basic health care services are treated as exempt supplies. Currently, these services include publicly funded homemaker services, such as cleaning, laundering, meal preparation and child care, rendered to an individual who, due to their age, infirmity or disability, requires such assistance in their home. However, these services do not reflect the changing needs of taxpayers and are not completely in line with the types of personal care services currently being provided by provincial and territorial governments.
As a result, the 2013 budget proposes to expand the homemaker services GST/HST exemption to include personal care services, such as bathing, feeding, and providing assistance with dressing and taking medication, rendered to individuals who require such services in their home due to age, infirmity or disability, where such services are publicly subsidized or funded. This measure will apply to homemaker services supplied after March 21, 2013.
Reports and Services for Non-Health Care Purposes
Services provided solely for non-health care purposes generally do not qualify as basic health care services and are intended to be taxable for GST/HST purposes, even if they are provided by a health care professional. For example, in 2010, amendments were made to the GST/HST legislation to clarify that procedures performed purely for cosmetic purposes do not qualify as exempt health care services. While the GST/HST exemption for health care services is intended to cover only services provided for medical purposes, recent court decisions have expanded the scope of this exemption beyond the government's intended policy.
To address this issue, this year's budget proposes that reports, examinations and other services that are unrelated to the protection, maintenance, or restoration of an individual's health, or palliative care, be subject to GST/HST. This will include services performed solely for determining liability in a court proceeding or for insurance purposes. Supplies of property and services in respect of taxable reports, examinations and other services (e.g., x-rays and lab tests) will also be taxable. However, similar supplies that relate to the protection, maintenance or restoration of an individual's health, or palliative care, or that are paid for by a provincial or territorial health insurance plan, will remain exempt.
These changes will apply to supplies made after March 21, 2013.
Business Information Requirements
In an effort to create a greater deterrent to those who fail to provide required information, the budget proposes to allow the Minister of National Revenue to withhold GST/HST refunds owing to businesses that have not provided prescribed business identification information as required under the ETA, including an organization's operating and legal name, business activities, ownership details and contact information. This measure should prove to be more persuasive than the current penalty of $100. However, the new measure will not come into effect until the enacting legislation receives Royal Assent.
Supplies of Paid Parking
Regardless of the provider, whether in the private or public sector, paid parking is considered to be a commercial activity and, as such, is taxable for GST/HST purposes. For this reason, paid parking has always been excluded from the general exemption provisions for supplies made by a public sector body ("PSB"), which includes municipalities, universities, public colleges, school authorities, hospitals, charities and non-profit organizations. However, it has come to light that special exemption provisions applicable to certain PSBs may have the unintended effect of exempting supplies of paid parking by these organizations. To address this issue and ensure a level playing field for suppliers of commercial parking, the 2013 budget proposes two measures to clarify that certain exemption provisions for PSBs do not apply to supplies of paid parking.
First, the simplifying provision that exempts all of a PSB's supplies of a property or service, where all or substantially all (i.e., 90 per cent or more) of the supplies of the property or service are made for free, will be amended to exclude supplies of paid parking made by way of lease, licence or similar arrangement in the course of a business carried on by a PSB. This will ensure that GST/HST applies to commercial parking facilities operated by a PSB, even where significant amounts of free parking are provided. However, occasional supplies of paid parking made by a PSB, such as those made as part of a fund-raising event, will continue to qualify for exemption. As this measure is intended to clarify the original intent of the legislation, it will take effect, retroactively, as of the date the GST legislation was enacted (i.e., January 1, 1991).
Similarly, the special GST/HST exemption for parking provided by charities that are not a municipality, university, public college, school or hospital will be clarified to ensure that it does not apply to paid parking supplied by way of lease, licence or similar arrangement in the course of a business carried on by a charity that has been established or is used by one of the aforementioned entities to operate a parking facility. This measure, which is designed to ensure the consistent tax treatment of supplies of paid parking, will apply to supplies made after March 21, 2013.
Pension Plan Rule Changes
Under the ETA, when an employer acquires, uses, or consumes goods or services as inputs into activities related to a registered pension plan, the employer is deemed to have made a taxable supply to the pension plan and to have collected GST/HST in respect of that supply. However, where the employer also makes an actual taxable supply to a pension entity, it is required to account for the GST/HST on both the actual and deemed supply. Where an employer is forced to account for the GST/HST twice (i.e., on both the actual and deemed supply), the ETA currently allows for a tax adjustment to be made by the employer to eliminate the double remittance of tax. Recognizing the complexities of these rules, the 2013 budget is proposing the following two simplification measures.
Election to Ignore GST/HST on Actual Taxable Supplies
Under the first proposed change, a participating employer that accounts for and remits tax on a deemed taxable supply will be permitted to jointly elect with a pension entity of its registered pension plan to treat an actual taxable supply as if it were made for no consideration. Once this joint election is made, it will remain in effect until it is jointly revoked, effective from the beginning of an employer's fiscal year.
However, under this proposed measure, the Minister of National Revenue will also have the power to cancel the election, effective from the beginning of a fiscal year of the employer, if the employer fails to remit tax, as required, on deemed supplies in that fiscal year, where those supplies relate to actual taxable supplies made to the pension entity. In addition, the Minister will have the authority to assess the employer for the tax on both the deemed and actual supplies from the effective date of the cancellation. While tax adjustments that would otherwise be available should be taken into account in determining any amount assessed, an employer might still be subject to interest.
This measure will apply to supplies made after March 21, 2013.
Relief from Accounting for Tax on Deemed Taxable Supplies
The current budget is also proposing to provide employers with full or partial relief from accounting for tax on deemed taxable supplies where the employer's activities in relation to a registered pension plan fall below certain thresholds. The proposed relief recognizes that some employers' involvement in pension plan activities is quite minimal, such as where an employer simply collects and remits pension plan contributions.
Under this measure, an employer will be relieved from the application of the deemed taxable supply rules for a fiscal year where the amount of GST (including the federal component of the HST) that the employer was (or would have been, except for this relief) required to account for and remit under those rules in its preceding fiscal year is less than $5,000 and 10 per cent of the total net GST (and federal component of HST) paid by all pension entities of the pension plan in that preceding fiscal year.
However, an employer will not be entitled to this full relief in a fiscal year for which the joint election to not account for tax on actual taxable supplies (as described above) has been made.
Partial relief will be available for certain employers who have not met the threshold requirements noted above. This limited relief will prevent the application of the deemed taxable supply rules in respect of internal pension activities, such as time spent by employees determining an employer's pension contribution deductions, provided that the amount of GST (and federal component of HST) that the employer was, or would have been, required to account for and remit in its preceding fiscal year, under the deemed taxable supply rules for those activities only, was below the $5,000 and 10 per cent thresholds. This relief is only available for inputs purchased by the employer for use or consumption in activities that relate to the pension plan, but are not related to the making of supplies to the pension entity.
Specific rules will apply in situations involving related employers participating in pension plans, and mergers, amalgamations or wind-ups of participating employers.
Unlike the proposed rule for full relief, partial relief will remain available where an employer has made the joint election to not account for tax on actual taxable supplies in a fiscal year. This measure will apply for fiscal years of an employer beginning after March 21, 2013.
Elimination of Exemption for Governor General
The budget proposes to eliminate the special exemption for the Governor General under the ETA. As a result, similar to other federal government departments, the Governor General will be subject to GST/HST for supplies acquired after June 30, 2013.
Electronic Suppression of Sales ("ESS") Software Penalties
Following Quebec's lead in attempting to address unreported sales, the federal government has proposed several new administrative monetary penalties and criminal offences under both the ETA and Income Tax Act ("ITA") in relation to the use of ESS (also known as "zapper") software in this year's budget.
The administrative monetary penalties, which are designed to combat tax evasion, range from $5,000 for a first offence and $50,000 for a subsequent offence for the use, possession or acquisition of ESS software to $10,000 for a first infraction and $100,000 for a subsequent infraction related to the development or sale of ESS software. For violations other than those related to the use of ESS software, a due diligence defence may be available.
The new criminal offences for the use, possession, acquisition, development or sale of ESS software (or similar activities) are substantial, with fines ranging from $10,000 to $1,000,000, and possible terms of imprisonment of up to 2 or 5 years (or both a fine and imprisonment), depending on the severity of the offence.
Note that these measures are in addition to existing penalty and offence provisions under the ETA, ITA and Criminal Code. To allow businesses time to ensure that ESS software is not being used, the new penalties will not come into effect until the later of January 1, 2014 and the date of Royal Assent to the enacting legislation.
Excise Duty Rate on Manufactured Tobacco
To bring the excise duty on manufactured tobacco more in line with the duty applied to cigarettes (currently at $17 on a carton of 200 cigarettes), effective March 22, 2013, the excise duty rate on manufactured tobacco will increase from $2.8925 to $5.3125 per 50 grams or fraction thereof (or $21.25 per 200 grams).
Previously Announced Measures
The federal government has also confirmed its intention to proceed with various previously announced commodity tax measures, including:
- proposed changes to certain GST/HST rules relating to financial institutions released on January 28, 2011 (see our tax development at: Proposed Changes to Certain GST/HST Rules for Financial Institutions); and
- automobile expense amounts for 2012 and 2013 (see our tax development at: 2013 Automobile Limits and Rates for more information on current year limits and rates).
Scientific Research and Experimental Development ("SR&ED") Program
In its 2012 budget, in addition to introducing a reduction to the basic tax credit rate, the exclusion of capital expenditures from the qualified expenditures base, and other limitations on SR&ED claims, the federal government expressed concern over the potential impact that contingency fee arrangements for the preparation of tax credit claims might have on the effectiveness of the SR&ED program. As a result, over the past year, the government released a discussion paper and invited input from stakeholders on the subject. Ryan actively participated in these consultations, and we are pleased to confirm that the government has determined that the direct regulation of contingency fees in this area is not required. As announced in this year's budget, this conclusion is based on the level of competition in the market, the fact that contingency fee rates have declined over time, and the absence of any evidence suggesting that these types of fee arrangements result in higher compliance costs. This decision will undoubtedly benefit taxpayers, particularly small and medium businesses, by ensuring that they have access to the program.
However, in response to the recommendations made by many stakeholders, the government has announced the following measures to help improve and protect the integrity of the program, reduce compliance costs, and deter questionable claims:
- SR&ED claim forms will require more detailed information about tax preparers and fee arrangements, particularly where a third party has assisted in the preparation of a claim, in order to assist in the identification of questionable and high-risk claims;
- in support of the detailed information requirements, a new penalty of $1,000 per claim has been proposed for situations in which the required information is missing, incomplete or inaccurate (with both a third-party preparer and a claimant being jointly and severally, or solidarily, liable for the penalty); and
- additional funding for the Canada Revenue Agency ("CRA") to conduct outreach programs for potential SR&ED claimants, including a new in-person service designed to ensure claimants have access to accurate information about the program's eligibility and supporting documentation requirements, and to increase its focus on the review of SR&ED claims with a high risk of non-compliance or ineligibility.
The first two measures will apply to SR&ED claims filed on or after the later of January 1, 2014 and the day the enacting legislation receives Royal Assent.
Customs Tariff Measures
Relief for Canadian Consumers
In order to support Canadian families and promote physical activity, this year's budget proposes to eliminate the tariffs on baby clothes and sports and athletic equipment (except for bicycles), effective for goods imported into Canada after March 31, 2013.
Tariff rates (currently between 2.5 and 20 per cent) will be reduced to "Free" under the Most-Favoured-Nation ("MFN") rates of duty. The budget indicates that these MFN reductions will also lead to reductions in the duty rates under other tariffs.
General Preferential Tariff Regime for Developing Countries
As part of this year's budget, the government has announced that Canada's General Preferential Tariff ("GPT") will be amended to better align it with the objective of providing development assistance to countries in need. As part of these changes, GPT eligibility will be withdrawn from 72 higher-income and export-competitive countries, including the entire G-20. The eligibility criteria for the GPT will be applied every two years on a go-forward basis. These changes to the GPT will go into effect for goods imported into Canada on or after January 1, 2015, and will be extended until December 31, 2024.
The Least Developed Country Tariff ("LDCT") system will correspondingly be changed to maintain the duty-free status of imports of textiles and apparel from least developed countries where the items are made using textile inputs from current GPT beneficiaries.
Payroll Tax Measures
The budget proposes to expand and extend, for one year, the Temporary Hiring Credit for Small Business, so employers who paid $15,000 or less in Employment Insurance ("EI") premiums for 2012 may receive up to $1,000 to offset the increase in its 2013 EI premiums.
Aboriginal Tax Policy
Consistent with prior years, the federal government has confirmed its continued support for direct taxation arrangements in which self-governing Aboriginal groups levy a sales tax within their jurisdictions. The government notes that, to date, it has entered into 34 such sales tax arrangements of this nature. Additionally, 14 agreements respecting personal income taxes are in effect with self-governing Aboriginal groups, under which they impose a personal income tax on all residents within their settlement lands.
Further details on the 2013 Federal Budget are available from the Department of Finance Canada web site at:
2013 Federal Budget