Vol. 145, No. 21 — October 12, 2011

Registration

SOR/2011-187 September 22, 2011

INCOME TAX ACT

Regulations Amending the Income Tax Regulations (Omnibus, No. 2)

P.C. 2011-935 September 22, 2011

His Excellency the Governor General in Council, on the recommendation of the Minister of Finance, pursuant to section 221 (see footnote a) of the Income Tax Act (see footnote b), hereby makes the annexed Regulations Amending the Income Tax Regulations (Omnibus, No. 2).

REGULATIONS AMENDING THE INCOME TAX REGULATIONS (OMNIBUS, NO. 2)

AMENDMENTS

1. (1) The Income Tax Regulations (see footnote 1) are amended by adding the following after section 7308:

7309. For the purpose of section 67.6 of the Act, penalties imposed under any of the following provisions are prescribed:

  • (a) paragraph 110.1(1)(a) of the Excise Act;
  • (b) paragraphs 280(1)(a), (1.1)(a) and (2)(a) of the Excise Tax Act; and
  • (c) subsection 53(1) of the Air Travellers Security Charge Act, as it read before April 2007.

(2) Section 7309 of the Regulations, as enacted by subsection (1), is replaced by the following:

7309. For the purpose of section 67.6 of the Act, penalties imposed under paragraph 110.1(1)(a) of the Excise Act are prescribed.

2. (1) Paragraph (c) of Class 12 in Schedule II to the Regulations is amended by striking out “or” at the end of subparagraph (i) and by replacing subparagraph (ii) with the following:

  1. (ii) $200, if acquired after May 25, 1976, and before May 2, 2006, or
  2. (iii) $500, if acquired after May 1, 2006;

(2) Paragraph (e) of Class 12 in Schedule II to the Regulations is amended by striking out “or” at the end of subparagraph (i) and by replacing subparagraph (ii) with the following:

  1. (ii) $200, if acquired after May 25, 1976, and before May 2, 2006, or
  2. (iii) $500, if acquired after May 1, 2006;

(3) Paragraph (h) of Class 12 in Schedule II to the Regulations is replaced by the following:

  • (h) a tool (other than an electronic communication device or electronic data processing equipment that is acquired after May 1, 2006 and that can be used for a purpose other than any of measuring, locating and calculating) costing less than
    1. (i) $100, if acquired before May 26, 1976,
    2. (ii) $200, if acquired after May 25, 1976, and before May 2, 2006, or
    3. (iii) $500, if acquired after May 1, 2006;

APPLICATION

3. (1) Subsection 1(1) applies to penalties imposed after March 22, 2004.

(2) Subsection 1(2) applies to taxation years that begin after March 2007.

4. Section 2 is deemed to have come into force on May 2, 2006.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issue and objectives

These amendments to the Income Tax Regulations (the “Regulations”) implement proposals that were announced in Budget 2004 and Budget 2006.

Description and rationale

These amendments to the Regulations implement the following two proposals:

1. Fines and penalties

Budget 2004 proposed a prohibition on the deductibility, for income tax purposes, of fines and penalties (other than a prescribed fine or penalty) imposed after March 22, 2004, under any law of a country or of a political subdivision of a country. Accordingly, the Income Tax Act was subsequently amended to prohibit the deduction of fines and penalties imposed after March 22, 2004, other than prescribed fines and penalties.

Budget 2004 also proposed that penalty interest imposed under paragraph 110.1(1)(a) of the Excise Act, any of paragraphs 280(1)(a), (1.1)(a) and (2)(a) of the Excise Tax Act (as those paragraphs then read) and subsection 53(1) of the Air Travellers Security Charge Act (as that subsection then read) be prescribed for this purpose until such time as the standardization of administrative rules — including penalties and interest — under various tax statutes had been completed.

Budget 2006 announced the proposals for the standardization of these administrative rules. Budget 2006 also proposed that after the completion of the standardization exercise, the above-mentioned prescriptions be removed insofar as they relate to the Air Travellers Security Charge Act and the GST/HST portions of the Excise Tax Act.

The Budget Implementation Act, 2006, assented to on June 22, 2006, enacted the necessary provisions for the standardization of administrative rules relating to interest and penalty payments made under various federal statutes, including the Excise Tax Act and the Air Travellers Security Charge Act (i.e. under those acts, the penalties calculated as interest referred to above were eliminated and the calculation of interest was standardized with other tax statutes). The new administrative rules apply to taxation years that begin on or after April 1, 2007. Accordingly, as announced in Budget 2006, and consistent with the standardization of administrative rules under various federal tax statutes, the prescribing of penalties imposed under the Excise Tax Act and the Air Travellers Security Charge Act is no longer necessary in respect of taxation years that begin after March 2007. Unlike the Excise Tax Act and the Air Travellers Security Charge Act, the Excise Act was not part of the standardization exercise (largely due to its antiquated administrative framework). The penalties imposed under paragraph 110.1(1)(a) of the Excise Act therefore continue to be calculated as interest on tax debts and result in a significantly higher interest rate than equivalent interest on tax debts under the Income Tax Act. Therefore, these penalties remain prescribed (i.e. deductible) for purposes of the rule under the Income Tax Act prohibiting the deduction of penalties.

Accordingly, the Regulations will enact the prescription of these penalties imposed after March 22, 2004, as announced in Budget 2004, and will remove the prescriptions of fines and penalties imposed under the Excise Tax Act and the Air Travellers Security Charge Act for taxation years that begin after March 2007, as announced in Budget 2006.

Prescription of these penalties continues the previously existing income tax treatment, pending conclusion of standardization of the affected measures, as announced in Budgets 2004 and 2006. Therefore, these measures do not result in any incremental costs.

The proposals relating to the fines and penalties are discussed on pages 336–37 of Budget 2004 and on page 243 of Budget 2006.

2. Capital cost allowance — Class 12

A portion of the capital cost of a taxpayer’s depreciable property is deductible as a capital cost allowance (the “CCA”) each year in computing the taxpayer’s income. The maximum CCA rate for each type of depreciable property is set out in the Regulations. In general, the CCA rates are set to reflect the useful life of assets.

In the context of earning income, kitchen utensils, medical or dental instruments, and tools that cost less than $200 are eligible for a 100% CCA rate under Class 12 of Schedule II to the Regulations. Such utensils, instruments and tools that do not qualify for Class 12 treatment (i.e. costing $200 or more) are generally eligible for a 20% CCA rate under Class 8 of Schedule II to the Regulations.

Class 12 is amended to enact the Budget 2006 proposal to increase the threshold for access to the 100% CCA rate to $500 from $200 for a kitchen utensil, a medical or dental instrument, and a tool acquired by a taxpayer on or after May 2, 2006. These amendments also enact the Budget 2006 proposal providing that electronic communication devices or electronic data processing equipment acquired after May 1, 2006, that cost less than $500 not be treated as a tool eligible for inclusion in Class 12 unless the device or equipment can be used only for the purposes of measuring, locating or calculating.

The threshold increase for the 100% CCA rate under Class 12 provides tax relief and reduces compliance costs for self-employed tradespeople and small businesses. The annual fiscal cost of the CCA measure, as estimated in Budget 2006, was $60 million during fiscal 2006–07 and $65 million in fiscal 2007–08. These estimates have been updated based on the most recent tax data. The updated costs are slightly lower, with a cost of $55 million in fiscal 2006–07 and $55 million in fiscal 2007–08. For 2010–11, the cost of the measure is estimated to be $30 million and is projected to decline to $15 million by 2013–14.

These proposals are discussed at page 238 of Budget 2006.

Consultation

The Budget 2004 and Budget 2006 proposals resulted from pre-budget consultations with a wide range of stakeholders. After the announcement of the proposals in the budgets, the amendments to the Regulations were developed in consultation with the Canada Revenue Agency. A draft of the proposed section 7309 of the Regulations, which lists the prescribed fines and penalties as announced in Budget 2004, was released on September 16, 2004, along with other Budget 2004 proposals. The Department of Finance has received one submission from the private sector recommending that penalties imposed under certain provincial sales tax statutes be prescribed. This recommendation is not being implemented.

Implementation, enforcement and service standards

The Income Tax Act provides the necessary compliance mechanisms. These mechanisms allow the Minister of National Revenue to assess and reassess tax payable, conduct audits and seize relevant records and documents.

Contact

Gurinderpal Grewal
Tax Legislation Division
Department of Finance
L’Esplanade Laurier
140 O’Connor Street
Ottawa, Ontario
K1A 0G5
Telephone: 613-992-1862

Footnote a
S.C. 2007, c. 35, s. 62

Footnote b
R.S., c. 1 (5th Supp.)

Footnote 1
C.R.C., c. 945