Budget Targets Loopholes

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    While the federal budget calls for no changes to income tax rates, much of it is directed at closing down what the government regards as loopholes, says a McCarthy Tétrault ‘Commentary.’ It says while certain transactions, depending on their particular facts, can be challenged by the government based on existing rules in the Income Tax Act (ITA), such challenges could be both time-consuming and costly. Consequently, the government is introducing specific legislative measures to ensure that ‘appropriate’ tax consequences apply to these transactions. Transactions that are targeted include character conversion trades, synthetic monetizations, 10/8 life insurance arrangements, transactions that avoid the application of the loss streaming rules on the acquisition of control of a corporation, and transactions designed to utilize losses of trusts. Budget 2013 will increase the effective tax rate on dividends other than ‘eligible dividends’ received by individuals. It proposes to reduce the gross-up factor applicable to non-eligible dividends from 25 per cent to 18 per cent and the corresponding dividend tax credit from two-thirds of the gross-up amount to 13/18. This measure will apply to non-eligible dividends paid after 2013. The lifetime exemption on capital gains realized by individuals on the disposition of certain qualified property, including “qualified small business corporation shares” will increase to $800,000 from $750,000, effective for the 2014 taxation year. For taxation years after 2014, the LCGE will be indexed to inflation. The new LCGE limit will benefit all individuals, including those who have previously used the LCGE. Two leveraged life insurance arrangements commonly referred to as ‘10/8 arrangements’ and ‘leveraged insured annuities’ will be monitored and if structures or transactions emerge that undermine the effectiveness of the proposed measures, further changes with possible retrospective application will be considered.