Finance Releases Detailed Legislative Changes

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The Finance Department released legislative changes that describe the proposed Income Tax Amendments announced on June 6, 2011. Of interest and significant complexity are the provisions around the following changes:

Corporations: Limit on Deferral of Tax (ITA Section 34.2 and 34.3). These new sections were necessary to remove reference to the 10-year reserving period on stub period income, which has expired and to limit the deferral of tax on corporate income earned through partnership. The notes describe two new sections related to "adjusted stub periodî accrual rules and related "qualifying transitional incomeî when a partnership has a fiscal period different from that of the corporation.

The income inclusion rules will not, however, apply to a corporation which is bankrupt. Special rules for cases where a foreign affiliate is a member of a partnership, or a multi-tier partnership structure are also outlined.

Tax Deferred TransactionsóFlow Through Shares. Previously, tax exempt capital gains resulted with the donation of flow through shares. Now, a class of flow through shares, defined as any shares of the capital stock of a company, or certain interests in a partnership, if any other shares of the class are a flow through share, acquired after March 22, 2011.

The taxpayer will be required to pay tax at normal capital gains rates on capital gains realized on these dispositions if there is a positive balance in the pool defined as the "exemption thresholdî. The gains will reduce the balance in that threshold; once it has been reduced to nil, any gain from the donation of publicly-listed shares to a qualified donee will be exempt from tax.